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Debt De-risking

Author

Listed:
  • Jannic Cutura
  • Gianpaolo Parise
  • Andreas Schrimpf

Abstract

We examine the incentive of corporate bond fund managers to manipulate portfolio risk in response to competitive pressure. We find that bond funds engage in a reverse fund tournament in which laggard funds actively de-risk their portfolios, trading-off higher yields for more liquid and safer assets. De-risking is stronger for laggard funds that have a more concave sensitivity of flows-to-performance, in periods of market stress, and when bond yields are high. We provide evidence that debt de-risking also reduces ex post liquidation costs by mitigating the investors' incentive to run ex ante. We argue that, in the presence of de-risking behaviors, flexible NAVs (swing pricing) may be counter-productive and induce moral hazard.

Suggested Citation

  • Jannic Cutura & Gianpaolo Parise & Andreas Schrimpf, 2020. "Debt De-risking," BIS Working Papers 868, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:868
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    More about this item

    Keywords

    corporate bond funds; bond market liquidity; asset managers; risk-taking; competitive pressures;
    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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