Investment funds under stress

Arbeitspapier

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 countrylevel 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.

Object Details

• ISBN: 978-92-899-3892-1
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 2323

Classification and Topics

• Classification: Wirtschaft ; International Investment; Long-term Capital Movements ; International Financial Markets ; Financial Forecasting and Simulation ; Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors ; Financial Institutions and Services: Government Policy and Regulation
• Subject: Investment funds ; Bayesian model averaging ; international capital flows ; portfoliovaluation ; prudential policy

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Gourdel, Régis ; Maqui, Eduardo ; Sydow, Matthias
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2019

Further information

• DOI: doi:10.2866/990022
• Handle: http://hdl.handle.net/10419/208357
• Last update: 10.03.2025, 11:42 AM CET