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

Author/Editor: Michael G Papaioannou ; Joonkyu Park ; Jukka Pihlman ; Han van der Hoorn
Publication Date: September 11, 2013
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: 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.
Series: Working Paper No. 13/193
Subject(s): Investment | Private sector | Financial institutions | Financial instruments | Asset management

Publication Date: September 11, 2013
ISBN/ISSN: 9781484336083/1018-5941 Format: Paper
Stock No: WPIEA2013193 Pages: 53
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