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Pension Liquidity Risk

Author

Listed:
  • Kristy Jansen

    (University of Southern California and De Nederlandsche Bank)

  • Sven Klingler

    (BI Norwegian Business School)

  • Angelo Ranaldo

    (University of St. Gallen; Swiss Finance Institute)

  • Patty Duijm

    (De Nederlandsche Bank)

Abstract

Pension funds rely on interest rate swaps to hedge the interest rate risk arising from their liabilities. Analyzing unique data on Dutch pension funds, we show that this hedging behavior exposes pension funds to liquidity risk due to margin calls, which can be as large as 15% of their total assets. Our analysis uncovers three key findings: (i) pension funds with tighter regulatory constraints use swaps more aggressively; (ii) in response to rising interest rates, triggering margin calls, pension funds predominantly sell safe and short-term government bonds; (iii) we demonstrate that this procyclical selling adversely affects the prices of these bonds.

Suggested Citation

  • Kristy Jansen & Sven Klingler & Angelo Ranaldo & Patty Duijm, 2024. "Pension Liquidity Risk," Swiss Finance Institute Research Paper Series 24-16, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2416
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    References listed on IDEAS

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    More about this item

    Keywords

    Pension funds; fixed income; interest rate swaps; liability hedging; liquidity risk; margin calls; price impact;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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