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

Martin Ewen and Marc Oliver Rieger

No 2019-01, Working Paper Series from University of Trier, Research Group Quantitative Finance and Risk Analysis

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.

Keywords: portfolio risk; volatility; SRRI; regulation (search for similar items in EconPapers)
JEL-codes: G11 G23 G32 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2019
New Economics Papers: this item is included in nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:trr:qfrawp:201901

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