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Liquidity Stress Tests for Fixed-Income Mutual Fund: an application for Chile

Author

Listed:
  • Tamara Gallardo
  • Fernando Martínez
  • Matías Muñoz
  • Félix Villatoro

Abstract

We implement a stress testing methodology for fixed-income Chilean mutual funds, while also documenting the evolution of these funds’ liquidity and providing evidence regarding managers’ liquidation strategy. Our main results are as follows. First, we find that mutual funds satisfy the resilience condition following a liquidity stress test. However, the selling needs by funds may cause significant pressure in certain sectors of financial fixed income markets, especially for bank and corporate bonds. Second, we observe a generalized decline in liquidity measures across the fixed-income fund industry, which has been driven by a sharp fall in exposure to money market instruments. Third, while our evidence is not conclusive regarding the liquidation strategy favored by Chilean mutual funds at all times, our results tend to suggest that managers have met redemption requests by selling liquid assets (money-market instruments and sovereign bonds), which is consistent with a partial waterfall liquidation strategy.

Suggested Citation

  • Tamara Gallardo & Fernando Martínez & Matías Muñoz & Félix Villatoro, 2026. "Liquidity Stress Tests for Fixed-Income Mutual Fund: an application for Chile," Working Papers Central Bank of Chile 1071, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:1071
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