An Lonn Dubh: Disentangling Market Liquidity Risk for Irish Investment Funds

Pawel Fiedor and Stamatoula Fragkou
Additional contact information
Pawel Fiedor: Central Bank of Ireland
Stamatoula Fragkou: Central Bank of Ireland

No 5/FS/21, Financial Stability Notes from Central Bank of Ireland

Abstract: In recent years, the Central Bank has been building its capabilities to develop a macroprudential stress-testing framework for investment funds. A key dimension of building that framework over time will be incorporating the differential liquidity of asset markets to which investment funds are exposed. As a first step in that direction, in this Note, we investigate the heterogeneity of market liquidity risk for investment funds domiciled in Ireland. We achieve this by utilizing the previously publishedAn Lonn Dubh baseline stress test. We show the effects of varying liquidity shocks across domestic and international asset markets when investment funds face substantial redemptions. Our findings underline Irish domiciled funds’ sensitivity to illiquidity in equity and debt markets. Further, liquidity strains appliedexogenously to US equity, US bank debt, or UK government debt markets, lead to a particularly high volume of‘second round’ losses for funds, reflecting the material exposures of the Irish fund sector to those asset classes.We outline the implications of these results for the continued development of the stress-testing framework, financial stability surveillance, and macroprudential regulation. Finally, our findings also shed light on the potential externalities that funds’ behaviour can impose on financial markets in the face of large redemption shocks and a contraction in market liquidity.

Date: 2021-07
New Economics Papers: this item is included in nep-isf and nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.centralbank.ie/docs/default-source/pub ... estment.pdf?sfvrsn=4 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cbi:fsnote:5/fs/21

Access Statistics for this paper

More papers in Financial Stability Notes from Central Bank of Ireland Contact information at EDIRC.
Bibliographic data for series maintained by Fiona Farrelly ().