Financial Fragilities and Risk-Taking in the Aftermath of Market Stress: Corporate Bond Funds and Policy Interventions after the Outbreak of the COVID-19 Pandemic
28 Pages Posted: 2 May 2022
Date Written: April 29, 2022
Abstract
This paper analyzes the risk-taking behavior of open-end corporate bond funds after the outbreak of the COVID-19 pandemic and the policy interventions that followed it. Using monthly security-level information on portfolio holdings at the global level in 2020, we show that funds more exposed to central banks’ pandemic-related asset purchase programmes, measured as the pre-pandemic share of eligible assets, increased the credit and liquidity risks of their portfolios more than less exposed ones. Highly exposed intermediaries raised the riskiness of their portfolios when they under-performed their peers or when they were characterized by greater financial fragilities associated to liquidity mismatch, i.e. when they already held significant shares of high yield bonds or less liquid assets at the onset of the pandemic. This evidence is consistent with the hypothesis that pandemic-related policy measures, aiming to restore market functioning and to mitigate the risk of investors’ runs, may have unintendedly strengthened funds’ risk-taking incentives.
Keywords: COVID-19, corporate bond funds, asset purchase programmes, risk-taking
JEL Classification: E50, G01, G11, G23
Suggested Citation: Suggested Citation