Institutional Investors’ Behavior during the Recent Financial Crisis: Evidence of Procyclicality

Abstract

This article provides evidence on the procyclical investment behavior of major institutional investors during the global financial crisis and identifies the main factors that could account for such behavior. It also considers the implications of procyclical behavior and suggests a framework for sound investment practices for long-term investors. Although such procyclical investment behavior may be considered rational from an individual institution’s perspective, we maintain that a consistent long-term investment behavior of institutional investors would lead to better long-term, risk-adjusted returns and could also lessen the potential adverse effects of the procyclical investing on global financial stability.

TOPICS: Financial crises and financial market history, legal and regulatory issues for structured finance