This article is part of a comprehensive research project on liquidity risk in asset management, which can be divided into three dimensions. The first dimension covers liability liquidity risk (or funding liquidity) modeling, the second dimension focuses on asset liquidity risk (or market liquidity) modeling, and the third dimension considers the asset-liability management of the liquidity gap risk (or asset-liability matching). The purpose of this research is to propose a methodological and practical framework in order to perform liquidity stress testing programs, which comply with regulatory guidelines (ESMA, 2019a, 2020a) and are useful for fund managers. The review of the academic literature and professional research studies shows that there is a lack of standardized and analytical models. The aim of this research project is then to fill the gap with the goal of developing mathematical and statistical approaches, and providing appropriate answers.

The three dimensions have been developed in the published working papers: (1) modeling the liability liquidity risk, (2) modeling the asset liquidity risk and (3) managing the asset-liability liquidity risk. This fourth working paper provides three examples and the comprehensive details to compute the redemption coverage ratio, implement reverse stress testing and estimate the liquidation cost of the redemption portfolio. The portfolios have been chosen in order to cover the main asset classes: large-cap stocks, small-cap stocks, sovereign bonds and corporate bonds. These basic examples are easily reproducible and may help quantitative analysts to understand the different steps to implement liquidity stress testing in asset management.


RC - Author - RONCALLI Thierry
PhD, Head of Quant Portfolio Strategy, Amundi Investment Institute
RC - Author - CHERIEF Amina
Fixed Income Quant Portfolio Strategy, Amundi Investment Institute