Cyclical investment behavior across financial institutions
Yannick Timmer, PhD candidate, Trinity College Dublin
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This paper contrasts the investment behavior of different financial institutions in debt securities as a response to price changes. For identification, I use unique security-level data from the German Microdatabase Securities Holdings Statistics. Banks and investment funds respond in a pro-cyclical manner to price changes.
In contrast, insurance companies and pension funds act counter-cyclically; they buy after price declines and sell after price increases.The heterogeneous responses can be explained by differences in their balance sheet structure. I exploit within-sector variation in the financial constraint to show that tighter constraints are associated with relatively more pro-cyclical investment behavior.