Liquidity Stress Testing in Asset Management - Part 1. Modeling the Liability Liquidity Risk

110 Pages Posted: 6 Jan 2021 Last revised: 7 Jan 2021

See all articles by Thierry Roncalli

Thierry Roncalli

Amundi Asset Management; University of Evry

Fatma Karray-Meziou

Amundi Asset Management

François Pan

Amundi Asset Management

Margaux Regnault

National Institute of Statistics and Economic Studies (INSEE) - National School for Statistical and Economic Administration (ENSAE)

Date Written: December 15, 2020

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 asset-liability liquidity risk management (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, 2019) 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 to develop mathematical and statistical approaches, and provide appropriate answers.

In this first part that focuses on liability liquidity risk modeling, we propose several statistical models for estimating redemption shocks. The historical approach must be complemented by an analytical approach based on zero-inflated models if we want to understand the true parameters that influence the redemption shocks. Moreover, we must also distinguish aggregate population models and individual-based models if we want to develop behavioral approaches. Once these different statistical models are calibrated, the second big issue is the risk measure to assess normal and stressed redemption shocks. Finally, the last issue is to develop a factor model that can translate stress scenarios on market risk factors into stress scenarios on fund liabilities.

Keywords: liquidity, stress testing, liability, redemption rate, redemption frequency, redemption severity, zero-inflated beta model, copula

JEL Classification: C02, G32

Suggested Citation

Roncalli, Thierry and Karray-Meziou, Fatma and Pan, François and Regnault, Margaux, Liquidity Stress Testing in Asset Management - Part 1. Modeling the Liability Liquidity Risk (December 15, 2020). Available at SSRN: https://ssrn.com/abstract=3749184 or http://dx.doi.org/10.2139/ssrn.3749184

Thierry Roncalli (Contact Author)

Amundi Asset Management ( email )

90 Boulevard Pasteur
Paris, 75015
France

University of Evry ( email )

Boulevard Francois Mitterrand
F-91025 Evry Cedex
France

Fatma Karray-Meziou

Amundi Asset Management

90 Boulevard Pasteur
Paris, 75015
France

François Pan

Amundi Asset Management

90 Boulevard Pasteur
Paris, 75015
France

Margaux Regnault

National Institute of Statistics and Economic Studies (INSEE) - National School for Statistical and Economic Administration (ENSAE)

92245 Malakoff Cedex
France

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