DP15123 Procyclical Asset Management and Bond Risk Premia

Author(s): Alexandru Barbu, Christoph Fricke, Emanuel Moench
Publication Date: August 2020
Date Revised: February 2021
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

We use unique institutional securities holdings data to examine the trading behaviour of delegated institutional capital and its impact on bond risk premia. We show that institutional fund managers trade strongly procyclically: they actively move into higher yielding, longer duration and lower rated securities as yields fall and spreads compress, and vice versa. Funds more exposed to negative yields increase their risk-taking more strongly, and this effect is particularly pronounced for those offering explicit minimum return guarantees. Institutional funds' investments have large and persistent price impact in both corporate and sovereign bond markets. We provide evidence that this procyclical behaviour is driven by career concerns among institutional fund managers.