Macroprudential stress testing: A proposal for the Luxembourg investment fund sector
This paper assesses ‘aggregate vulnerability’, a measure of systemic risk, in the investment fund sector of Luxembourg by implementing a macroprudential stress testing model. While based on the proposal by Fricke and Fricke (2017), this paper focuses on the calibration of key parameters such as the flow-performance sensitivity and price impacts that are included in the model to capture the so-called ‘second-round effects’ of an initial adverse shock to funds’ returns. According to the empirical results, limited degrees of vulnerability were found for the main fund categories such as equity funds, bond funds and mixed funds. This implies that the investment fund sector in Luxembourg does not raise any particular concern for financial stability as of November 2019. However, since the stress test was performed against a background of increased risk of a reversal in global risk premia, continued monitoring of the sector is warranted.
Keywords: investment funds; macroprudential stress test; flow-performance sensitivity; price impact; fire sales; systemic risk
JEL Classification: G11, G12, G23
|Téléchargement||Cahier d'étude 141 (pdf, 2 MByte)|