A0852
Title: Macroprudential stress testing: A proposal for the United States fund sector
Authors: Thi Thanh Huyen Nguyen - Le Mans University (France)
Bui Dieu Thao Nguyen - Le Mans University (France) [presenting]
Abstract: The first part assesses the aggregate vulnerability of the US fund sector by implementing an empirical framework for macro-prudential stress testing. First, t investors' behaviour is captured in response to adverse funds performance by assuming the non-linearity of the flow performance sensitivity (FPS) in the Markov Switching VAR. Second, the second-round effect comprising impacts of additional funding shocks and asset fire sales on the funds' resilience is accounted for by estimating the time-varying price impact ratio (based on the Amihud ratio). The model finally defines an indicator of aggregate vulnerability for each US fund category. Empirical results showed that limited degrees of vulnerability were found for almost all categories of funds. The growth funds have been the most vulnerable, followed by large C funds and MicroC funds. This implies that the investment fund sector in the US does not raise any particular concerns about financial stability as of September 2018. The second part assesses the interconnectedness in the US fund sector. A VAR estimation is performed on a system of aggregate vulnerability indicators of the six categories of funds. Then the variance decompositions are applied to detect how much of the future uncertainty associated with the stress in fund category $i$ can be explained by stress shocks in fund category $j$. Empirical results showed that funds exposed to less liquid asset classes are more likely to be affected by shocks from others.
