"The global financial crisis caught many financial market participants by surprise. Institutional
investors, by and large, were no exception. As the crisis intensified, concerns about capital
preservation arose, and several investors responded by abandoning long-term investment
strategies, reducing risk exposures, and switching to safer asset classes, usually with the
intention to switch back as soon as market conditions improved.
This institutional investors tended to move with the rest of the market. This “institutional herding” is what we refer to as procyclical investment behavior .
Many institutional investors have long investment horizons, which allow them to ride out
short-term volatility in asset prices. In theory, they should be able to avoid the pitfalls of
herding, which tend to hurt performance in the long run. Recent financial stress episodes
have, however, demonstrated that various types of institutional investors are not immune to
herd behavior. This “institutional herding” is what we refer to in this paper as to in procyclical investment behavior.
Examples of Institutional Herd behavior: Pension Funds(1),Life Insurers(2),Endowment Funds(3),
Mutual Funds(4),Sovereign Wealth Funds(5) and Central Banks(6).
1. Were net sellers of equities during the financial crisis.
2. They contributed to the downward spyral in the equities markets, they sold equities to
bolster their balance sheets.
3. Harvard endowment decreased its uncalled capital commitments by roughly
US$3 billion,
4. Some SWFs decided to reduce exposures to, in particular, U.S. and U.K. banks
in the second quarter of 2009.
5. Central bank reserve managers joined the flight to quality and collectively pulled
out more than US$500 billion of deposits and other investments from the banking
sector from December 2007 to March 2009.
With long-term investment horizons Institutional Investors should be able to avoid the pitfalls of
herding, which tend to hurt performance in the long run. Recent financial stress episodes
have, however, demonstrated that various types of institutional investors are not immune to
herd behavior.
During periods of global financial distress , where investors’ procyclical strategies can accentuate the fragility, of the financial system.
In particular, prolonged very low interest rates and unconventional
monetary policy measures could push many institutional investors’ risk appetite to the point
of creating significant adverse side effects, including possible mispricing of credit risk and
underestimation of liquidity risks".
Source: IMF Working Paper
Monetary and Capital Markets Department
by Michael G. Papaioannou, Joonkyu Park, Jukka Pihlman, and
Han van der Hoorn
investors, by and large, were no exception. As the crisis intensified, concerns about capital
preservation arose, and several investors responded by abandoning long-term investment
strategies, reducing risk exposures, and switching to safer asset classes, usually with the
intention to switch back as soon as market conditions improved.
This institutional investors tended to move with the rest of the market. This “institutional herding” is what we refer to as procyclical investment behavior .
short-term volatility in asset prices. In theory, they should be able to avoid the pitfalls of
herding, which tend to hurt performance in the long run. Recent financial stress episodes
have, however, demonstrated that various types of institutional investors are not immune to
herd behavior. This “institutional herding” is what we refer to in this paper as to in procyclical investment behavior.
Examples of Institutional Herd behavior: Pension Funds(1),Life Insurers(2),Endowment Funds(3),
Mutual Funds(4),Sovereign Wealth Funds(5) and Central Banks(6).
1. Were net sellers of equities during the financial crisis.
2. They contributed to the downward spyral in the equities markets, they sold equities to
bolster their balance sheets.
3. Harvard endowment decreased its uncalled capital commitments by roughly
US$3 billion,
4. Some SWFs decided to reduce exposures to, in particular, U.S. and U.K. banks
in the second quarter of 2009.
5. Central bank reserve managers joined the flight to quality and collectively pulled
out more than US$500 billion of deposits and other investments from the banking
sector from December 2007 to March 2009.
With long-term investment horizons Institutional Investors should be able to avoid the pitfalls of
herding, which tend to hurt performance in the long run. Recent financial stress episodes
have, however, demonstrated that various types of institutional investors are not immune to
herd behavior.
During periods of global financial distress , where investors’ procyclical strategies can accentuate the fragility, of the financial system.
In particular, prolonged very low interest rates and unconventional
monetary policy measures could push many institutional investors’ risk appetite to the point
of creating significant adverse side effects, including possible mispricing of credit risk and
underestimation of liquidity risks".
Source: IMF Working Paper
Monetary and Capital Markets Department
by Michael G. Papaioannou, Joonkyu Park, Jukka Pihlman, and
Han van der Hoorn
