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An Lonn Dubh: A Framework for Macroprudential Stress Testing of Investment Funds

Author

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  • Fiedor, Pawel

    (Central Bank of Ireland)

  • Katsoulis, Petros

    (University of London)

Abstract

We have developed a macroprudential stress testing framework of investment funds. This framework is a tool specifically designed to engage with the Bank’s data, and allows financial stability analysts to rapidly prototype stress tests. This enables the Bank to assess financial stability concerns within the investment funds sector in a targeted and timely manner. Further to the description of the architecture of the framework, we present the results of a baseline stress test, which acts as an initial implementation of the framework. These results show that contagion among investment funds is expected to be limited under normal market conditions. However, under heightened market illiquidity and increased investor sensitivity to fund returns we document the potential for significant spillovers and indirect contagion due to common asset holdings in the investment funds sector domiciled in Ireland.

Suggested Citation

  • Fiedor, Pawel & Katsoulis, Petros, 2019. "An Lonn Dubh: A Framework for Macroprudential Stress Testing of Investment Funds," Financial Stability Notes 2/FS/19, Central Bank of Ireland.
  • Handle: RePEc:cbi:fsnote:2/fs/19
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    File URL: https://centralbank.ie/docs/default-source/publications/financial-stability-notes/no-2-an-lonn-dubh-a-framework-for-macroprodential-stress-testing-of-investment-funds.pdf?sfvrsn=8
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    References listed on IDEAS

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    4. Ron Anderson & Jon Danielsson & Chikako Baba & Udaibir S Das & Heedon Kang & Miguel A. Segoviano Basurto, 2018. "Macroprudential Stress Tests and Policies: Searching for Robust and Implementable Frameworks," IMF Working Papers 18/197, International Monetary Fund.
    5. repec:bfr:fisrev:2018:22:6 is not listed on IDEAS
    6. Agostino Capponi & Paul Glasserman & Marko Weber, 2018. "Swing Pricing for Mutual Funds: Breaking the Feedback Loop Between Fire Sales and Fund Runs," Working Papers 18-04, Office of Financial Research, US Department of the Treasury.
    7. Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, vol. 47(2), pages 236-249, February.
    8. Baranova, Yuliya & Coen, Jamie & Noss, Joseph & Lowe, Pippa & Silvestri, Laura, 2017. "Simulating stress across the financial system: the resilience of corporate bond markets and the role of investment funds," Bank of England Financial Stability Papers 42, Bank of England.
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