Vulnerable Asset Management? The Case of Mutual Funds

45 Pages Posted: 5 Nov 2017

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: 2017

Abstract

Is the asset management sector a source of financial instability? This paper contributes to the debate by performing a macroprudential stress test in order to quantify systemic risks in the mutual fund sector. For this purpose we include the welldocumented flow-performance relationship as an additional funding shock in the model of Greenwood et al. (2015), where systemic risks arise due to funds' fire sales of commonly held assets. Using data on U.S. equity mutual funds for the period 2003-14, we quantify both fund-specific and aggregate vulnerabilities to fire-sales over time. Our main finding is that the funds' aggregate vulnerability according to this propagation mechanism is generally small. We explore the determinants of individual funds' vulnerability to systemic asset liquidations, highlighting the importance of funds' liquidity transformation. Therefore, regulators should monitor structural vulnerabilities in the fund sector arising through liquidity transformation.

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

JEL Classification: G10, G11, G23

Suggested Citation

Fricke, Christoph and Fricke, Daniel, Vulnerable Asset Management? The Case of Mutual Funds (2017). Bundesbank Discussion Paper No. 32/2017. Available at SSRN: https://ssrn.com/abstract=3065182

Christoph Fricke (Contact Author)

Deutsche Bundesbank ( email )

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

Daniel Fricke

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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