Cyclical investment behaviour of investment funds: its heterogeneity and drivers

Do open-ended funds amplify negative feedback loops of declining asset prices through procyclical selling and reduced purchases of securities experiencing falling prices? Leveraging security-level data of Czech funds, this study reveals procyclical sales of government bonds and held fund shares. Therefore, funds may amplify market downturns and financial stress in government bonds, which are crucial for price discovery and financial stability. Cyclical sales of cross-fund exposures then show adverse network effects. Furthermore, the study examines factors influencing procyclical sales. The results show that cyclical sales are intensified by the extent of funding constraints and liquidity mismatch.