Connected funds

Daniel Fricke () and Hannes Wilke

No 48/2020, Discussion Papers from Deutsche Bundesbank

Abstract: Investment funds are highly connected with each other, but also with the broader financial system. In this paper, we quantify potential vulnerabilities arising from funds' connectedness. While previous work exclusively focused on indirect connections (overlapping asset portfolios) between investment funds, we develop a macroprudential stress test that also includes direct connections (cross-holdings of fund shares). In our application for German investment funds, we find that these direct connections are very important from a financial stability perspective. Our main result is that the German fund sector's aggregate vulnerability can be substantial and tends to increase over time, suggesting that the fund sector can amplify adverse developments in global security markets. We also highlight spillover risks to the broader financial system, since fund sector losses would be largely borne by fund investors from the financial sector. Overall, we make an important step towards a more financial-system-wide view on fund sector vulnerabilities.

Keywords: asset management; investment funds; systemic risk; fire sales; liquidity risk; cross-holdings; spillover effects (search for similar items in EconPapers)
JEL-codes: G10 G11 G23 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:482020

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