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Investment Fund Risk: The Tale in the Tails

Author

Listed:
  • Shaw, Frances

    (Central Bank of Ireland)

  • Dunne, Peter G.

    (Central Bank of Ireland)

Abstract

Efforts to develop risk assessment metrics for the non-bank financial sector have been given impetus following the post-crisis broadening of the IMF's Financial Stability Assessments and recent efforts by the Financial Stability Board to address structural vulnerabilities from asset management activities. Using a novel database of investment funds reporting in Ireland, we employ Marginal Expected Shortfall metrics to capture investment fund exposures to pervasive industry-wide tail events. We reveal the primary fund sectors most responsible for widespread extreme return shortfalls. Fund attributes are then used to explain (mostly) the cross-sectional variation in marginal expected shortfall using panel regression techniques. We find that leverage, derivative usage, redemption rates, cash holdings, openness and retail investor focus are important factors that consistently explain the variation in fund-specific sensitivity to pervasive tail risk. Finally, we provide new evidence that ex ante exposure to pervasive extreme negative returns explains significantly more of the risk premium implicit in ex post returns than traditional beta.

Suggested Citation

  • Shaw, Frances & Dunne, Peter G., 2017. "Investment Fund Risk: The Tale in the Tails," Research Technical Papers 01/RT/17, Central Bank of Ireland.
    • Handle: RePEc:cbi:wpaper:01/rt/17
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    References listed on IDEAS

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    Cited by:

    1. Fricke, Christoph & Fricke, Daniel, 2021. "Vulnerable asset management? The case of mutual funds," Journal of Financial Stability, Elsevier, vol. 52(C).
    2. Jin, Xisong & Nadal De Simone, Francisco, 2020. "Monetary policy and systemic risk-taking in the Euro area investment fund industry: A structural factor-augmented vector autoregression analysis," Journal of Financial Stability, Elsevier, vol. 49(C).
    3. Kurter, Zeynep O., 2024. "How macroeconomic conditions affect systemic risk in the short and long-run?," The North American Journal of Economics and Finance, Elsevier, vol. 70(C).
    4. Fricke, Christoph & Fricke, Daniel, 2017. "Vulnerable Funds?," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168209, Verein für Socialpolitik / German Economic Association.
    5. Kurter, Zeynep O., 2022. "How macroeconomic conditions affect systemic risk in the short and long-run?," The Warwick Economics Research Paper Series (TWERPS) 1407, University of Warwick, Department of Economics.
    6. Nadal De Simone, Francisco, 2021. "Measuring the deadly embrace: Systemic and sovereign risks," Research in International Business and Finance, Elsevier, vol. 56(C).

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    Keywords

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    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • 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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