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Emerging economies have tried to promote long-term debt because it reduces maturity mismatches and the probability of crises. This paper uses unique evidence from the leading case of Chile to study to what extent there is domestic demand for long-term instruments. The authors analyze monthly asset-level portfolios of Chilean institutional investors (mutual funds, pension funds, and insurance companies) and compare their maturity structure to that of US bond mutual funds. Despite being thought to invest long term, Chilean asset-management institutions (mutual and pension funds) hold large amounts of short-term assets relative to US mutual funds and Chilean insurance companies. Short-termism is not driven by lack of instrument availability or tactical behavior. Instead, it seems to be explained by the desire to minimize inflation risk and, more importantly, by manager incentives that tilt demand toward short-term instruments. Extending the maturity of emerging market debt may require reducing risk and reshaping investor incentives.
Bond --- Debt Markets --- Emerging economies --- Emerging market --- Emerging market debt --- Emerging Markets --- Finance and Financial Sector Development --- Inflation --- Inflation risk --- Institutional investors --- Instrument --- Insurance --- Insurance companies --- Long-term debt --- Long-term instruments --- Maturity --- Maturity mismatches --- Maturity structure --- Mutual Funds --- Pension --- Pension funds --- Portfolios --- Private Sector Development --- Short-term assets
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Developing countries are trying to develop long-term financial markets and institutional investors are expected to play a key role. This paper uses unique evidence on the universe of institutional investors from the leading case of Chile to study to what extent mutual funds, pension funds, and insurance companies hold and bid for long-term instruments, and which factors affect their choices. The paper uses monthly asset-level portfolios to show that, despite the expectations, mutual and pension funds invest mostly in short-term assets relative to insurance companies. The significant difference across maturity structures is not driven by the supply side of debt or tactical behavior. Instead, it seems to be explained by manager incentives (related to short-run monitoring and the liability structure) that, combined with risk factors, tilt portfolios toward short-term instruments, even when long-term investing yields higher returns. Thus, the expansion of large institutional investors does not necessarily imply longer-term markets.
Capital Markets --- Debt Markets --- Debt Maturity --- Deposit Insurance --- Emerging Markets --- Finance and Financial Sector Development --- Institutional Investors --- Insurance Industry --- Long-Term Finance --- Maturity Structure --- Mutual Funds --- Non Bank Financial Institutions --- Pension Funds --- Private Sector Development
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Emerging economies have tried to promote long-term debt because it reduces maturity mismatches and the probability of crises. This paper uses unique evidence from the leading case of Chile to study to what extent there is domestic demand for long-term instruments. The authors analyze monthly asset-level portfolios of Chilean institutional investors (mutual funds, pension funds, and insurance companies) and compare their maturity structure to that of US bond mutual funds. Despite being thought to invest long term, Chilean asset-management institutions (mutual and pension funds) hold large amounts of short-term assets relative to US mutual funds and Chilean insurance companies. Short-termism is not driven by lack of instrument availability or tactical behavior. Instead, it seems to be explained by the desire to minimize inflation risk and, more importantly, by manager incentives that tilt demand toward short-term instruments. Extending the maturity of emerging market debt may require reducing risk and reshaping investor incentives.
Bond --- Debt Markets --- Emerging economies --- Emerging market --- Emerging market debt --- Emerging Markets --- Finance and Financial Sector Development --- Inflation --- Inflation risk --- Institutional investors --- Instrument --- Insurance --- Insurance companies --- Long-term debt --- Long-term instruments --- Maturity --- Maturity mismatches --- Maturity structure --- Mutual Funds --- Pension --- Pension funds --- Portfolios --- Private Sector Development --- Short-term assets
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This paper exploits a large-scale natural experiment to study the equilibrium effects of information restrictions in credit markets. In 2012, Chilean credit bureaus were forced to stop reporting defaults for 2.8 million individuals (21% of the adult population). We show that the effects of information deletion on aggregate borrowing and total surplus are theoretically ambiguous and depend on the pre-deletion demand and cost curves for defaulters and non-defaulters. Using panel data on the universe of bank borrowers in Chile combined with the deleted registry information, we implement machine learning techniques to measure changes in lenders' cost predictions following deletion. Deletion reduces (raises) predicted costs the most for poorer defaulters (non-defaulters) with limited borrowing histories. Using a difference-in-differences design, we find that individuals exposed to increases in predicted costs reduce borrowing by 6.4%, while those exposed to decreases raise borrowing by 11.8% following the deletion, for a 3.5% aggregate drop in borrowing. Using the difference-in-difference estimates as inputs into the theoretical framework, we find evidence that deletion reduced aggregate welfare under a variety of assumptions about lenders' pricing strategies.
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This paper studies the equilibrium effects of information restrictions in credit markets using a large-scale natural experiment. In 2012, Chilean credit bureaus were forced to stop reporting defaults for 2.8 million individuals (21% of the adult population). Using panel data on the universe of bank borrowers in Chile combined with the deleted registry information, we implement machine learning techniques to measure changes in the predictions lenders can make about default rates following deletion. Deletion lowers (raises) predicted default the most for poorer defaulters (non-defaulters) with limited borrowing histories. Using a difference-in-differences design, we show that individuals exposed to increases in predicted default reduce borrowing by 6.4% following deletion, while those exposed to decreases raise borrowing by 11.8%. In aggregate, deletion reduces borrowing by 3.5%. Taking the difference-in-difference estimates as inputs into a model of borrowing under adverse selection, we find that deletion reduces surplus under a variety of assumptions about lenders' pricing strategies.
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