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Preferred habitat investors in the UK government bond market

Author

Listed:
  • Giese, Julia

    (Bank of England)

  • Joyce, Michael

    (Bank of England)

  • Meaning, Jack

    (Bank of England)

  • Worlidge, Jack

    (Bank of England)

Abstract

Most tests of preferred habitat theory are indirect; they infer the existence of preferred habitat behaviour in financial markets by examining the behaviour of asset prices. We instead identify preferred habitat behaviour directly from whether investors show a preference towards a particular duration habitat. We do so by making use of a newly available and highly granular data set on the UK government bond (gilt) market, which allows us to examine investors’ gilt transactions and their daily stock of gilt holdings during 2016 and 2017. Using cluster analysis, we find that investors can be classified into distinct groups, some of which more closely display the behavioural properties that theory associates with preferred habitat investors. We find that these groups of investors are less sensitive to price movements than other investor groups and include institutional investors, like life insurers and pension funds, which are typically associated with preferred habitat behaviour. Evidence from the Bank of England’s QE4 purchase programme during August 2016 to March 2017 suggests that these investor groups sold relatively more of their gilt holdings to the Bank than other groups of investors.

Suggested Citation

  • Giese, Julia & Joyce, Michael & Meaning, Jack & Worlidge, Jack, 2021. "Preferred habitat investors in the UK government bond market," Bank of England working papers 939, Bank of England.
  • Handle: RePEc:boe:boeewp:0939
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    References listed on IDEAS

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    More about this item

    Keywords

    Preferred habitat; gilt market; yield curve; cluster analysis;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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