Vulnerable Asset Management? The Case of Mutual Funds

46 Pages Posted: 9 Nov 2016 Last revised: 11 Jan 2018

See all articles by Christoph Fricke

Christoph Fricke

Deutsche Bundesbank

Daniel Fricke

Deutsche Bundesbank; University College London; London School of Economics & Political Science (LSE) - Systemic Risk Centre

Multiple version iconThere are 2 versions of this paper

Date Written: May 16, 2017

Abstract

Is the asset management sector a source of financial instability? This paper develops a macroprudential stress test model which allows to quantify systemic vulnerabilities due to fire-sales in this sector. The model incorporates the flow-performance relationship as an additional funding shock in the model of Greenwood et al. (2015). Using data on U.S. equity mutual funds for the period 2003-14, we quantify both fund-specific and system-wide (aggregate) vulnerabilities to fire-sales over time. Our main finding is that the aggregate vulnerability, according to this propagation mechanism, is relatively small in comparison with values reported for banks. Our paper also contributes to the ongoing discussion on the SIFI designation of Non-Bank Non-Insurer entities. For this purpose, we explore the determinants of individual funds' vulnerability to systemic asset liquidations, highlighting the importance of size and portfolio illiquidity. Therefore, regulators should monitor structural vulnerabilities in the fund sector arising through liquidity transformation.

Keywords: asset management, mutual funds, systemic risk, fire sales, liquidity

Suggested Citation

Fricke, Christoph and Fricke, Daniel, Vulnerable Asset Management? The Case of Mutual Funds (May 16, 2017). Available at SSRN: https://ssrn.com/abstract=2866301 or http://dx.doi.org/10.2139/ssrn.2866301

Christoph Fricke

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Daniel Fricke (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

London School of Economics & Political Science (LSE) - Systemic Risk Centre

Houghton St, London WC2A 2AE, United Kingdom
London

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