Development of a Liquidity Stress Test

Challenge

The ESMA (European Securities and Markets Authority) released new guidelines on Liquidity Stress Testing in UCITS and AIFS. RiskQuest was asked to develop Liquidity Stress Tests (LST) for equity funds, a bond- ,an asset-backed security fund and a real estate fund.

Approach

Due to the fact that the guidelines were released recently, there was still little literature regarding this type of stress testing. Therefore, we combined the little literature there was, together with stress testing for banks and our own expertise in stress testing. Eventually, we developed a new methodology, implemented it in Python and documented it. We did this with a team of two; a Riskquest consultant, supervised by a manager.

Impact and Benefits

We periodically deliver reports with the methodology and results according to changes in the funds. These reports give clear insights to the fund manager such that he/she is able to assess the magnitude of the liquidity risks of the funds over time.

Result

The ability of the team to use their experience and outside the box thinking in a new field let to comprehensible and useful stress tests that are in line with the guidelines.The stress tests are reviewed and approved by the AFM.

For more information contact: Leffert Lansink or Job Stekelenburg