Simulating Stress Across the Financial System: The Resilience of Corporate Bond Markets and the Role of Investment Funds

Abstract

This paper provides a first step in developing a system-wide stress simulation. The model incorporates several important features of the financial system. These include several types of institution (including banks and non-banks) and how their actions may propagate and amplify stress. Rather than attempting to predict outcomes of a given stress scenario for financial sector balance sheets, it seeks to explore those conditions under which systemic stress may crystallise.

Keywords: stress simulation, corporate bonds, investment funds, dealers, market liquidity, systemic stress, amplification

JEL Classification: G01, G11, G12, G14, G19, G23, G24