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Procyclical Behavior of Institutional Investors During the Recent Financial Crisis

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  • Michael G Papaioannou
  • Joonkyu Park
  • Jukka Pihlman
  • Han van der Hoorn
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    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.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/193.

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    Length: 53
    Date of creation: 11 Sep 2013
    Date of revision:
    Handle: RePEc:imf:imfwpa:13/193

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    Related research

    Keywords: Investment; Private sector; Financial institutions; Financial instruments; Asset management; financial stability; financial system; financial markets; bonds; hedge; financial assets; hedge fund; bond market; net present value; equity markets; financial statements; asset bubbles; bond funds; international capital; treasury bonds; hedge fund managers; financial sector; hedge funds; asset valuations; bond portfolio; corporate bond markets; hedging; financial systems; global stock markets; stock investment; sovereign bonds; financial instability; international financial markets; financial contracts; bond valuation; currency risk; financial derivatives; asset markets; government bonds; stock prices; moral hazard; corporate bonds; high-yield corporate bonds; international capital markets; bond flows; financial intermediaries;

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    References

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    1. Palle S. Andersen, 1997. "Forecast errors and financial developments," BIS Working Papers 51, Bank for International Settlements.
    2. Dasgupta, Amil & Prat, Andrea & Verardo, Michela, 2010. "The Price Impact of Institutional Herding," CEPR Discussion Papers 7804, C.E.P.R. Discussion Papers.
    3. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
    4. Anna Ilyina, 2006. "Portfolio Constraints and Contagion in Emerging Markets," IMF Staff Papers, Palgrave Macmillan, vol. 53(3), pages 1.
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    9. Weiyu Guo & Mark E. Wohar, 2006. "Identifying Regime Changes In Market Volatility," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 29(1), pages 79-93.
    10. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1994. "The Financial Accelerator and the Flight to Quality," NBER Working Papers 4789, National Bureau of Economic Research, Inc.
    11. Alessandro Beber & Michael W. Brandt & Kenneth A. Kavajecz, 2009. "Flight-to-Quality or Flight-to-Liquidity? Evidence from the Euro-Area Bond Market," Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 925-957, March.
    12. de Lis, Santiago Fernández & Herrero, Alicia Garcia, 2010. "Dynamic Provisioning: Some Lessons from Existing Experiences," ADBI Working Papers 218, Asian Development Bank Institute.
    13. Sunil Sharma & Sushil Bikhchandani, 2000. "Herd Behavior in Financial Markets: A Review," IMF Working Papers 00/48, International Monetary Fund.
    14. Burton G. Malkiel, 2003. "Passive Investment Strategies and Efficient Markets," European Financial Management, European Financial Management Association, vol. 9(1), pages 1-10.
    15. Russ Wermers, 1999. "Mutual Fund Herding and the Impact on Stock Prices," Journal of Finance, American Finance Association, vol. 54(2), pages 581-622, 04.
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