Procyclical Behavior of Institutional Investors During the Recent Financial Crisis: Causes, Impacts, and Challenges
September 11, 2013
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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.
Subject: Asset allocation, Asset and liability management, Expenditure, Financial crises, Financial institutions, Liquidity, Mutual funds, Pension spending
Keywords: asset allocation, Asset allocation, asset class, asset owner, endowment fund, Financial crisis, flight to quality, Global, hedge fund, individual investor, institutional investors, investment behavior, investment horizon, Liquidity, long-term investments, long-term investor, Mutual funds, Pension spending, procyclicality, risk tolerance, sovereign investor, WP
Pages:
53
Volume:
2013
DOI:
Issue:
193
Series:
Working Paper No. 2013/193
Stock No:
WPIEA2013193
ISBN:
9781484336083
ISSN:
1018-5941
