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Procyclical Behavior of Institutional Investors During the Recent Financial Crisis : Causes, Impacts, and Challenges

Procyclical Behavior of Institutional Investors During the Recent Financial Crisis : Causes, Impacts, and Challenges
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Volume/Issue:
2013/193
Series:
IMF Working Papers
Author(s):
Michael Papaioannou, Joonkyu Park, Jukka Pihlman, and Han Hoorn
Publisher:
INTERNATIONAL MONETARY FUND
Published Date:
September 2013
DOI:
http://dx.doi.org/10.5089/9781484336083.001
ISBN:
9781484336083
ISSN:
1018-5941
Page:
53
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.
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