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Debt Derisking

Author

Listed:
  • Jannic Cutura

    (Directorate General Information Systems, European Central Bank, 60640 Frankfurt, Germany)

  • Gianpaolo Parise

    (Finance Department, EDHEC Business School, EDHEC, 06200 Nice, France; Centre for Economic Policy Research, 06200 Nice, France)

  • Andreas Schrimpf

    (Centre for Economic Policy Research, 06200 Nice, France; Monetary and Economic Department, Bank for International Settlements, 4051 Basel, Switzerland)

Abstract

We examine how corporate bond fund managers manipulate portfolio risk in response to incentives. We find that liquidity risk concerns drive the allocation decisions of underperforming funds, whereas tournament incentives are of secondary importance. This leads laggard fund managers to trade off yield for liquidity while holding the exposure to other sources of risk constant. The documented derisking is stronger for managers with shorter tenure and is reinforced by a more concave flow to performance sensitivity and by periods of market stress. Derisking meaningfully supports ex post laggard fund returns. Flexible net asset values (swing pricing) may, however, reduce derisking incentives and create moral hazard.

Suggested Citation

  • Jannic Cutura & Gianpaolo Parise & Andreas Schrimpf, 2025. "Debt Derisking," Management Science, INFORMS, vol. 71(1), pages 615-634, January.
    • Handle: RePEc:inm:ormnsc:v:71:y:2025:i:1:p:615-634
    DOI: 10.1287/mnsc.2022.03406
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    Keywords

    mutual funds; incentives; derisking; fragility; bond liquidity; financial institutions; investment; finance; portfolio; financial institutions; markets;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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