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Procyclical Behavior of Institutional Investors During the Recent Financial Crisis; Causes, Impacts, and Challenges

Author

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

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.

Suggested Citation

  • Michael G. Papaioannou & Joonkyu Park & Jukka Pihlman & Han van der Hoorn, 2013. "Procyclical Behavior of Institutional Investors During the Recent Financial Crisis; Causes, Impacts, and Challenges," IMF Working Papers 13/193, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:13/193
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Ciarlone, Alessio & Miceli, Valeria, 2016. "Escaping financial crises? Macro evidence from sovereign wealth funds' investment behaviour," Emerging Markets Review, Elsevier, vol. 27(C), pages 169-196.
    2. Bank for International Settlements, 2016. "Regulatory change and monetary policy," CGFS Papers, Bank for International Settlements, number 55.
    3. Joseph Crowley, 2015. "Central and Commercial Bank Balance Sheet Risk Before, During, and After the Global Financial Crisis," IMF Working Papers 15/47, International Monetary Fund.
    4. Patty Duijm & Sophie Steins Bisschop, 2015. "Short-termism of long-term investors? The investment behaviour of Dutch insurance companies and pension funds," DNB Working Papers 489, Netherlands Central Bank, Research Department.

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