Pension Liquidity Risk

Kristy Jansen, Sven Klingler, Angelo Ranaldo and Patty Duijm

Working Papers from DNB

Abstract: Pension funds rely on interest rate swaps to hedge the interest rate risk arising from their liabilities. Analyzing unique data on Dutch pension funds, we show that this hedging behavior exposes pension funds to liquidity risk due to margin calls, which can be as large as 15% of their total assets. Our analysis uncovers three key findings: (i) pension funds with tighter regulatory constraints use swaps more aggressively; (ii) in response to rising interest rates, triggering margin calls, pension funds predominantly sell safe and short-term government bonds; (iii) we demonstrate that this procyclical selling adversely affects the prices of these bonds.

Keywords: Pension funds; fixed income; interest rate swaps; liability hedging; liquidity risk; margin calls; price impact (search for similar items in EconPapers)
JEL-codes: E43 G12 G18 (search for similar items in EconPapers)
Date: 2024-02
New Economics Papers: this item is included in nep-age, nep-ban, nep-eec, nep-ifn and nep-rmg
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Working Paper: Pension Liquidity Risk (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:dnb:dnbwpp:801

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