Discussion Paper Details

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Title: Debt De-risking

Author(s): Jannic Cutura, Gianpaolo Parise and Andreas Schrimpf

Publication Date: July 2020

Keyword(s): bonds, De-risking, liquidity, Mutual funds, swing pricing and tournaments

Programme Area(s): Financial Economics

Abstract: We examine the incentive of corporate bond fund managers to manipulate portfolio risk in response to competitive pressure. We find that bond funds engage in a reverse fund tournament in which laggard funds actively de-risk their portfolios, trading-off higher yields for more liquid and safer assets. De-risking is stronger for laggard funds that have a more concave sensitivity of flows-to-performance, in periods of market stress, and when bond yields are high. We provide evidence that debt de-risking also reduces ex post liquidation costs by mitigating the investors' incentive to run ex ante. We argue that, in the presence of de-risking behaviors, flexible NAVs (swing pricing) may be counter-productive and induce moral hazard.

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Bibliographic Reference

Cutura, J, Parise, G and Schrimpf, A. 2020. 'Debt De-risking'. London, Centre for Economic Policy Research.