Investment Funds Under Stress

52 Pages Posted: 31 Oct 2019

See all articles by Régis Gourdel

Régis Gourdel

WU Vienna University of Economics and Business

Eduardo Maqui Lopez

European Central Bank (ECB)

Matthias Sydow

European Central Bank (ECB)

Date Written: October, 2019

Abstract

This paper presents a model for stress testing investment funds, based on a broad worldwide sample of primary open-end equity and bond funds. First, we employ a Bayesian technique to project the impact of macro-financial scenarios on country-level portfolio flows worldwide that are constructed from fund-level asset holdings. Second, from these projected country-level flows, we model the scenarios’ repercussions on individual funds along a three year horizon. Importantly, we further decompose portfolio flows, disentangling the specific contributions of transactions, valuation and foreign exchange effects. Overall, our results indicate that the impact of a global adverse macro-financial scenario leads to a median depletion in assets under management (AUM) of 24% and 5%, for euro area-domiciled equity and bond funds respectively, largely driven by valuation effects. Scenario and results both present similarities to the global financial crisis. We use historical information on fund liquidations to estimate a threshold for a drop in AUM that signals a high likelihood of a forthcoming liquidation. Based on this, we estimate that 5.8% and 0.5% of euro area-domiciled equity and bond funds respectively could go into liquidation. Such empirical thresholds can be useful for the implementation of prudential policy tools, such as redemption gates.

Keywords: Bayesian model averaging, international capital flows, investment funds, portfolio valuation, prudential policy

JEL Classification: F21, G15, G17, G23, G28

Suggested Citation

Gourdel, Régis and Maqui Lopez, Eduardo and Sydow, Matthias, Investment Funds Under Stress (October, 2019). Available at SSRN: https://ssrn.com/abstract=3478539 or http://dx.doi.org/10.2139/ssrn.3478539

Régis Gourdel (Contact Author)

WU Vienna University of Economics and Business ( email )

Welthandelsplatz 1, Building D1, 3rd Floor
Vienna, 1020
Austria

Eduardo Maqui Lopez

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Matthias Sydow

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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