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Pension Liquidity Risk

Author

Listed:
  • Jansen, Kristy
  • Klingler, Sven
  • Ranaldo, Angelo
  • Duijm, Patty

Abstract

Pension funds use interest rate swaps to hedge the interest rate risk arising from their liabilities. Analyzing regulatory data on Dutch pension funds, we show that pension funds with worse funding ratios, indicating greater fragility, use swaps more aggressively. These swap positions expose pension funds to the risk of margin calls, which can exceed 6% of their total assets, when interest rates rise. Pension funds respond to realized margin calls by selling safe government bonds with medium-term maturities. This procyclical selling behavior adversely affects the prices of the sold bonds and thereby exposes pension funds to market liquidity risk.

Suggested Citation

  • Jansen, Kristy & Klingler, Sven & Ranaldo, Angelo & Duijm, Patty, 2026. "Pension Liquidity Risk," CEPR Discussion Papers 21095, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:21095
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    File URL: https://cepr.org/publications/DP21095
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    Keywords

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    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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