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Vulnerable asset management? The case of mutual funds

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  • Fricke, Christoph
  • Fricke, Daniel

Abstract

Is the asset management sector a source of financial instability? This paper contributes to the debate by performing a macroprudential stress test in order to quantify systemic risks in the mutual fund sector. For this purpose we include the welldocumented flow-performance relationship as an additional funding shock in the model of Greenwood et al. (2015), where systemic risks arise due to funds' fire sales of commonly held assets. Using data on U.S. equity mutual funds for the period 2003-14, we quantify both fund-specific and aggregate vulnerabilities to fire-sales over time. Our main finding is that the funds' aggregate vulnerability according to this propagation mechanism is generally small. We explore the determinants of individual funds' vulnerability to systemic asset liquidations, highlighting the importance of funds' liquidity transformation. Therefore, regulators should monitor structural vulnerabilities in the fund sector arising through liquidity transformation.

Suggested Citation

  • Fricke, Christoph & Fricke, Daniel, 2017. "Vulnerable asset management? The case of mutual funds," Discussion Papers 32/2017, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdps:322017
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    Cited by:

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    2. Lyócsa, Štefan & Baumöhl, Eduard & Výrost, Tomáš, 2022. "YOLO trading: Riding with the herd during the GameStop episode," Finance Research Letters, Elsevier, vol. 46(PA).
    3. Mirza, Harun & Moccero, Diego & Palligkinis, Spyros & Pancaro, Cosimo, 2020. "Fire sales by euro area banks and funds: What is their asset price impact?," Economic Modelling, Elsevier, vol. 93(C), pages 430-444.
    4. Fernando Duarte & Thomas M. Eisenbach, 2021. "Fire‐Sale Spillovers and Systemic Risk," Journal of Finance, American Finance Association, vol. 76(3), pages 1251-1294, June.
    5. Ramadiah, Amanah & Caccioli, Fabio & Fricke, Daniel, 2020. "Reconstructing and stress testing credit networks," Journal of Economic Dynamics and Control, Elsevier, vol. 111(C).
    6. Barucca, Paolo & Mahmood, Tahir & Silvestri, Laura, 2021. "Common asset holdings and systemic vulnerability across multiple types of financial institution," Journal of Financial Stability, Elsevier, vol. 52(C).
    7. 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.
    8. Fricke, Daniel & Wilke, Hannes, 2020. "Connected Funds," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224511, Verein für Socialpolitik / German Economic Association.
    9. Caccioli, Fabio & Ferrara, Gerardo & Ramadiah, Amanah, 2020. "Modelling fire sale contagion across banks and non-banks," Bank of England working papers 878, Bank of England, revised 18 Feb 2021.
    10. Rohan Arora & Guillaume Bédard-Pagé & Guillaume Ouellet Leblanc & Ryan Shotlander, 2019. "Bond Funds and Fixed-Income Market Liquidity: A Stress-Testing Approach," Technical Reports 115, Bank of Canada.
    11. Danilo Delpini & Stefano Battiston & Guido Caldarelli & Massimo Riccaboni, 2019. "Systemic risk from investment similarities," PLOS ONE, Public Library of Science, vol. 14(5), pages 1-15, May.
    12. Thierry Roncalli & Fatma Karray-Meziou & Franc{c}ois Pan & Margaux Regnault, 2021. "Liquidity Stress Testing in Asset Management -- Part 1. Modeling the Liability Liquidity Risk," Papers 2101.02110, arXiv.org.
    13. Jean-Baptiste Hasse, 2022. "Systemic risk: a network approach," Empirical Economics, Springer, vol. 63(1), pages 313-344, July.
    14. Marco Bardoscia & Paolo Barucca & Stefano Battiston & Fabio Caccioli & Giulio Cimini & Diego Garlaschelli & Fabio Saracco & Tiziano Squartini & Guido Caldarelli, 2021. "The Physics of Financial Networks," Papers 2103.05623, arXiv.org.
    15. Kang-Soek Lee, 2020. "Macroprudential stress testing: A proposal for the Luxembourg investment fund sector," BCL working papers 141, Central Bank of Luxembourg.
    16. Agostino Capponi & Paul Glasserman & Marko Weber, 2020. "Swing Pricing for Mutual Funds: Breaking the Feedback Loop Between Fire Sales and Fund Redemptions," Management Science, INFORMS, vol. 66(8), pages 3581-3602, August.
    17. Ramadiah, Amanah & Fricke, Daniel & Caccioli, Fabio, 2022. "Backtesting macroprudential stress tests," Journal of Economic Dynamics and Control, Elsevier, vol. 137(C).
    18. Andreu, Laura & Gimeno, Ruth & Ortiz, Cristina, 2022. "Diversification and manager autonomy in fund families: Implications for investors," Research in International Business and Finance, Elsevier, vol. 60(C).
    19. Aldasoro, Iñaki & Hüser, Anne-Caroline & Kok, Christoffer, 2022. "Contagion accounting in stress-testing," Journal of Economic Dynamics and Control, Elsevier, vol. 137(C).
    20. Thierry Roncalli, 2021. "Liquidity Stress Testing in Asset Management -- Part 3. Managing the Asset-Liability Liquidity Risk," Papers 2110.01302, arXiv.org.

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    More about this item

    Keywords

    asset management; mutual funds; systemic risk; fire sales; liquidity;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • 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

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