Template-Type: ReDIF-Paper 1.0
Author-Name: Jannic Cutura
Author-X-Name-First: Jannic
Author-X-Name-Last: Cutura
Author-Name: Gianpaolo Parise
Author-X-Name-First: Gianpaolo
Author-X-Name-Last: Parise
Author-Name: Andreas Schrimpf
Author-X-Name-First: Andreas
Author-X-Name-Last: Schrimpf
Title: Debt De-risking
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.
Length: 44 pages
Creation-Date: 2020-06
File-URL: https://www.bis.org/publ/work868.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work868.htm
File-Format: text/html
Number: 868
Classification-JEL: G11, G23, G32, E43
Keywords: corporate bond funds, bond market liquidity, asset managers, risk-taking, competitive pressures
Handle: RePEc:bis:biswps:868