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A theoretical model analysing investment funds’ liquidity management and policy measures

Author

Listed:
  • Giuzio, Margherita
  • Grill, Michael
  • Kryczka, Dominika
  • Weistroffer, Christian

Abstract

Large differences between the liquidity of investment funds’ assets and liabilities (i.e. liquidity mismatches) can create vulnerabilities in the financial system and expose funds to a risk of large outflows and sudden drops in market liquidity. From a macroprudential perspective, the current regulatory framework may not sufficiently address the risks stemming from liquidity mismatches in investment funds. By modelling the liquidity management of an open-ended fund, this article provides theoretical justification for pre-emptive policy measures such as cash buffers that enhance financial stability by helping to increase the resilience of investment funds. JEL Classification: G11, G23, G28

Suggested Citation

  • Giuzio, Margherita & Grill, Michael & Kryczka, Dominika & Weistroffer, Christian, 2021. "A theoretical model analysing investment funds’ liquidity management and policy measures," Macroprudential Bulletin, European Central Bank, vol. 12.
    • Handle: RePEc:ecb:ecbmbu:2021:0012:4
    Note: 3546207
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    More about this item

    Keywords

    Asset sales; Liquidity risk; Macroprudential policy; Open-ended funds; Run risk;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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