Investment funds would magnify a liquidity crisis – BoE

Bank of England’s first stress simulation suggests corporate spreads would gap 41bp on 1% redemptions

Liquidity drip
Drying up: redemptions induce more fund investors to pull their money out

Academics have welcomed the Bank of England’s (BoE) first stress simulation of a redemption run in European investment funds, applauding its introduction of endogenous risk themes to the policy debate. Some critics, however, feel the model could go further.

The BoE introduced the simulation to work out whether the funds absorb or exacerbate financial shocks.

“The Bank of England is doing state-of-the-art research, ahead of its peers in how they think about this problem,” says Jon Danielsson

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