Procyclical Behavior of Institutional Investors During the Recent Financial Crisis

Causes, Impacts, and Challenges

• Author(s): Mr.Michael G Papaioannou, Mr.Joonkyu Park, Jukka Pihlman, Han van der Hoorn,
• Publisher: International Monetary Fund
• Pages: 53
• ISBN_10: 1484336089
  ISBN_13: 9781484336083
  
• Language: en
• Categories: Business & Economics / Finance / Financial Risk Management , Business & Economics / Public Finance , Business & Economics / Finance / General ,

Description:... 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.