N°23-94: Financial Intermediaries and Demand for Duration

We investigate intermediaries demand for long-term cash flows by estimating a characteristic-based demand system on the equity holdings of primary dealers, pension funds, banks, and insurance companies. Institutions’ demand for equity duration varies over time and in the cross-section as a function of measures of capital availability. In the time-series, when financial constraints are tight, institutions curtail their demand for long-term claims and become more exposed to reinvestment risk. In the cross-section, unconstrained institutions tilt their portfolio more strongly toward long-duration stocks compared to their constrained peers. We conclude that institutional constraints impair the ability to seek for the hedging properties of long duration claims, to the point that institutions may be forced to leave their “preferred-habitat” allocation. Counterfactual analysis shows that shifts in preference for duration generate sizeable effects in the cross-section of stocks, with a stronger impact on firms with long-term cash flows such as high ESG-rated companies.