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ECMI Working Paper No. 4 / July 2017

This paper contrasts the investment behaviour of different financial institutions in debt securities as a response to price changes. For identification, the author uses unique security-level data from the German Microdatabase Securities Holdings Statistics. Banks and investment funds respond in a pro-cyclical manner to price changes. Insurance companies and pension funds act counter-cyclically, however; they buy after price declines and sell after price increases. The heterogeneous responses can be explained by differences in their balance sheet structure. Within-sector variation in the financial constraint is used to show that tighter constraints are associated with more pro-cyclical investment behaviour.

Yannick Timmer is a PhD candidate at the Department of Economics, Trinity College Dublin. 

The paper has received the Best Paper Award at the ECMI Annual Conference 2016, held in Brussels on 9 November.