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Systemic Impact of the Risk Based Fund Classification and Implications for Fund Management

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  • Martin Ewen
  • Marc Oliver Rieger

Abstract

This paper examines the impact of European legislation regarding risk classification of mutual funds. We conduct analyses on a set of worldwide equity indices and find that a strategy based on the long term volatility as it is imposed by the Synthetic Risk Reward Indicator (SRRI) would lead to substantial variations in exposures ranging from short phases of very high leverage to long periods of under-investments that would be required to keep the risk classes. In some cases funds will be forced to migrate to higher risk classes due to limited means to reduce volatilities after crises events. In other cases they might have to migrate to lower risk classes or increase their leverage to ridiculous amounts. Overall we find if the SRRI creates a binding mechanism for fund managers, it will have substantial negative impact on portfolio management.

Suggested Citation

  • Martin Ewen & Marc Oliver Rieger, 2019. "Systemic Impact of the Risk Based Fund Classification and Implications for Fund Management," Working Paper Series 2019-01, University of Trier, Research Group Quantitative Finance and Risk Analysis.
    • Handle: RePEc:trr:qfrawp:201901
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    File URL: http://www.uni-trier.de/fileadmin/fb4/prof/BWL/FIN/QFRA_Working_Papers/QFRA_19-01.pdf
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    References listed on IDEAS

    as
    1. Francis X. Diebold & Kamil Yilmaz, 2009. "Measuring Financial Asset Return and Volatility Spillovers, with Application to Global Equity Markets," Economic Journal, Royal Economic Society, vol. 119(534), pages 158-171, January.
    2. Paul Harrison & Harold H. Zhang, 1999. "An Investigation Of The Risk And Return Relation At Long Horizons," The Review of Economics and Statistics, MIT Press, vol. 81(3), pages 399-408, August.
    3. Amit Goyal & Pedro Santa-Clara, 2003. "Idiosyncratic Risk Matters!," Journal of Finance, American Finance Association, vol. 58(3), pages 975-1008, June.
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    5. Robert Engle, 2001. "GARCH 101: The Use of ARCH/GARCH Models in Applied Econometrics," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 157-168, Fall.
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    Cited by:

    1. Herr, Donovan & Clausse, Emilien & Vrins, Frédéric, 2021. "Migration to the PRIIPs framework: what impact on the European risk indicator of UCITS funds ?," LIDAM Discussion Papers LFIN 2021012, Université catholique de Louvain, Louvain Finance (LFIN).

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    More about this item

    Keywords

    portfolio risk; volatility; SRRI; regulation;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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