DP15123 Procyclical Asset Management and Bond Risk Premia

Author(s): Alexandru Barbu, Christoph Fricke, Emanuel Moench
Publication Date: August 2020
Keyword(s): Asset Price Volatility, career concerns, demand pressures, institutional accounts, Institutional funds, port- folio rebalancing, price impact, procyclical asset management
JEL(s): E43, G11, G23
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15123

Institutional funds have concentrated ownership by a few institutional investors, infrequent outflows and essentially no leverage. Yet using unique granular data on the bond holdings of institutional funds, we show that their trading behavior is strongly procyclical: they actively move into higher yielding, longer duration and lower rated securities in response to lower interest rates, and vice versa. Institutional funds' risk- taking increases when interest rates turn negative, particularly in funds with explicit minimum return guarantees. Their trading has large and persistent price impact. We provide evidence that this procyclical behavior is driven by career concerns among institutional fund managers.