Procyclical Behavior of Institutional Investors During the Recent Financial Crisis: Causes, Impacts, and Challenges
IMF Working Papers, September 11, 2013
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- Procyclical Behavior of Institutional Investors During the Recent Financial Crisis: Causes, Impacts, and Challenges
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Bibliographic details
- Authors: Michael G. Papaioannou, Joonkyu Park, Jukka Pihlman, Han van der Hoorn
- Published: September 11, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484336083.001
Summary and main conclusion
- 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.
- Main conclusion: 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.
Evidence on procyclical behavior
- Presents evidence on the procyclical investment behavior of major institutional investors during the global financial crisis.
Factors accounting for procyclicality
- Identifies the main factors that could account for procyclical investment behavior (text lists factors broadly; original paper develops these factors in detail).
Implications and impacts
- Discusses the implications of procyclical behavior for institutions and for global financial stability.
- Highlights potential adverse effects of institutional investors’ procyclical behavior on global financial stability.
Framework and policy recommendations for long-term investors
- Proposes a framework for sound investment practices for long-term investors.
- Policy implication emphasized: behaving consistently with longterm investing can improve long-term, risk-adjusted returns and reduce systemic adverse effects.
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