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Macroprudential stress testing: A proposal for the Luxembourg investment fund sector

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  • Kang-Soek Lee

Abstract

This paper assesses ‘aggregate vulnerability’, a measure of systemic risk, in the investment fund sector of Luxembourg by implementing a macroprudential stress testing model. While based on the proposal by Fricke and Fricke (2017), this paper focuses on the calibration of key parameters such as the flow-performance sensitivity and price impacts that are included in the model to capture the so-called ‘second-round effects’ of an initial adverse shock to funds’ returns. According to the empirical results, limited degrees of vulnerability were found for the main fund categories such as equity funds, bond funds and mixed funds. This implies that the investment fund sector in Luxembourg does not raise any particular concern for financial stability as of November 2019. However, since the stress test was performed against a background of increased risk of a reversal in global risk premia, continued monitoring of the sector is warranted.

Suggested Citation

  • Kang-Soek Lee, 2020. "Macroprudential stress testing: A proposal for the Luxembourg investment fund sector," BCL working papers 141, Central Bank of Luxembourg.
    • Handle: RePEc:bcl:bclwop:bclwp141
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    File URL: https://www.bcl.lu/en/publications/Working-papers/141/BCLWP141.pdf
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    References listed on IDEAS

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    Cited by:

    1. Ciccone, Julien & Marchiori, Luca & Morhs, Romuald, 2022. "The flow-performance relationship of global investment funds," Journal of International Money and Finance, Elsevier, vol. 127(C).

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    More about this item

    Keywords

    investment funds; macroprudential stress test; flow-performance sensitivity; price impact; fire sales; systemic risk;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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