Connected Funds

63 Pages Posted: 1 Sep 2020

See all articles by Daniel Fricke

Daniel Fricke

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

Hannes Wilke

Deutsche Bundesbank

Multiple version iconThere are 2 versions of this paper

Date Written: 2020

Abstract

Investment funds are highly connected with each other, but also with the broader financial system. In this paper, we quantify potential vulnerabilities arising from funds' connectedness. While previous work exclusively focused on indirect connections (overlapping asset portfolios) between investment funds, we develop a macroprudential stress test that also includes direct connections (cross-holdings of fund shares). In our application for German investment funds, we find that these direct connections are very important from a financial stability perspective. Our main result is that the German fund sector's aggregate vulnerability can be substantial and tends to increase over time, suggesting that the fund sector can amplify adverse developments in global security markets. We also highlight spillover risks to the broader financial system, since fund sector losses would be largely borne by fund investors from the financial sector. Overall, we make an important step towards a more financial-system-wide view on fund sector vulnerabilities.

Keywords: asset management, investment funds, systemic risk, fire sales, liquidity risk, cross-holdings, spillover effects

JEL Classification: G10, G11, G23

Suggested Citation

Fricke, Daniel and Wilke, Hannes, Connected Funds (2020). Deutsche Bundesbank Discussion Paper No. 48/2020, Available at SSRN: https://ssrn.com/abstract=3684270 or http://dx.doi.org/10.2139/ssrn.3684270

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

Hannes Wilke

Deutsche Bundesbank ( email )

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

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