Working-paper.jpg
9.12.2021  

Liquidity Stress Testing in Asset Management - Part 4. A Step-by-step Practical Guide

Published December 9, 2021

> 10 minutes

> 10 minutes

ABSTRACT


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.

Discover our part 3: Managing the Asset-Liability Liquidity Risk


This website is solely for informational purposes.
 
This website does not constitute an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or any other product or service. Any securities, products, or services referenced may not be registered for sale with the relevant authority in your jurisdiction and may not be regulated or supervised by any governmental or similar authority in your jurisdiction.
 
Furthermore, nothing in this website is intended to provide tax, legal, or investment advice and nothing in this website should be construed as a recommendation to buy, sell, or hold any investment or security or to engage in any investment strategy or transaction. There is no guarantee that any targeted performance or forecast will be achieved.

Get in touch with us

Our online help service is available to answer your question.

My personal information

If you have a question about our company or one of our products, please complete the form to get in touch. Please do not mention your account numbers or critical data in this form.

Civility*
CAPTCHA This question is for testing whether or not you are a human visitor and to prevent automated spam submissions.

(*) Required fields
All our job offers (Permanent and temporary position, Internship, Apprenticeship or VIE) are available on our dedicated website: https://jobs.amundi.com.

Register and apply directly online.