Vulnerability and Contagion in U.S. Equity Mutual Funds

We study the vulnerability and contagion risk across six major investment styles of the U.S. Domestic Equity Mutual Funds over the period 2003–2023. Using granular stock-level data, we extend the macroprudential stress-testing framework of Fricke and Fricke (2021) by incorporating stock betas, regime-dependent flow-performance sensitivities, and time-varying asset-specific price impacts. This approach allows capturing cross-style heterogeneity often masked in aggregate studies. To map system-wide spillovers, we implement a Ridge-VAR generalized connectedness framework. While all styles respond to market shocks in the same direction, we document substantial heterogeneity in the magnitude of their responses. Growth and Growth Income funds consistently exhibit the highest vulnerability, particularly during the subprime crisis, whereas Small, Mid, and Micro Cap funds remain comparatively resilient. Furthermore, Growth and Mid Cap funds consistently act as shock transmitters, whereas Micro Cap funds emerge primarily as shock absorbers. While aggregate connectedness remained high across both the subprime and COVID-19 crises, the drivers of contagion shift. We advocate for a style-level regulatory framework and counter-cyclical buffers to dampen fire-sale amplification.