Procyclical Behavior of Institutional Investors During the Recent Financial Crisis: Causes, Impacts, and Challenges

Michael Papaioannou, Joonkyu Park, Jukka Pihlman and Han Hoorn

No 2013/193, IMF Working Papers from International Monetary Fund

Abstract: This paper (i) provides evidence on the procyclical investment behavior of major institutional investors during the global financial crisis; (ii) identifies the main factors that could account for such behavior; (iii) discusses the implications of procyclical behavior; and (iv) proposes a framework for sound investment practices for long-term investors. Such procyclical investment behavior is understandable and may be considered rational from an individual institution’s perspective. However, our main conclusion is that behaving in a manner consistent with longterm investing would lead to better long-term, risk-adjusted returns and, importantly, could lessen the potential adverse effects of the procyclical investment behavior of institutional investors on global financial stability.

Keywords: WP; flight to quality; investment behavior; long-term investor; risk tolerance; asset owner; hedge fund; individual investor; investment horizon; sovereign investor; Financial crisis; long-term investments; institutional investors; procyclicality; asset allocation; asset class; endowment fund; Pension spending; Asset allocation; Liquidity; Mutual funds; Global (search for similar items in EconPapers)
Pages: 53
Date: 2013-09-11
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Citations: View citations in EconPapers (21)

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