TY - UNPB
T1 - Investment funds under stress
AU - Gourdel, Regis
AU - Sydow, Matthias
AU - Maqui, Eduardo
PY - 2019
Y1 - 2019
N2 - 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.
AB - 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.
KW - Investment funds
KW - Bayesian model averaging
KW - International capital flows
KW - Portfolio valuation
KW - Prudential policy
UR - https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2323~e3e995fe5c.en.pdf
U2 - 10.2866/990022
DO - 10.2866/990022
M3 - Working Paper/Preprint
T3 - ECB Working Paper Series
BT - Investment funds under stress
PB - European Central Bank
ER -