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

See all articles by Nicola Branzoli

Nicola Branzoli

Bank of Italy

Raffaele Gallo

Bank of Italy - Research Department

Antonio Ilari

Bank of Italy

Dario Portioli

Bank of Italy

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

Branzoli, Nicola and Gallo, Raffaele and Ilari, Antonio and Portioli, Dario, 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 (April 29, 2022). Available at SSRN: https://ssrn.com/abstract=4096677 or http://dx.doi.org/10.2139/ssrn.4096677

Nicola Branzoli

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Raffaele Gallo (Contact Author)

Bank of Italy - Research Department ( email )

Via Nazionale 91
00184 Roma
Italy

Antonio Ilari

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Dario Portioli

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
82
Abstract Views
470
Rank
543,153
PlumX Metrics