Cyclical Investment Behaviour across Financial Institutions

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Yannick Timmer

This paper contrasts the investment behaviour of different financial institutions in debt securities as a response to price changes. For identification, the author uses unique security-level data from the German Microdatabase Securities Holdings Statistics. Banks and investment funds respond in a pro-cyclical manner to price changes. Insurance companies and pension funds act counter-cyclically, however; they buy after price declines and sell after price increases. The heterogeneous responses can be explained by differences in their balance sheet structure. Within-sector variation in the financial constraint is used to show that tighter constraints are associated with more pro-cyclical investment behaviour.

Yannick Timmer is a PhD candidate at the Department of Economics, Trinity College Dublin. 

This paper was granted the Best Paper Award at the 2016 ECMI Annual Conference. It is now forthcoming in the Journal of Financial Economics