Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/278282 
Year of Publication: 
2022
Series/Report no.: 
ECB Working Paper No. 2757
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
This paper develops a framework for the short-term modelling of market risk and shock propagation in the investment funds sector, including bi-layer contagion effects through funds' cross-holdings and overlapping exposures. Our work tackles in particular climate risk, with a first-of-its-kind dual view of transition and physical climate risk exposures at the fund level. So far, while fund managers communicate more aggressively on their awareness of climate risk, it is still poorly assessed. Our analysis shows that the topology of the fund network matters and that both contagion channels are important in its study. A stress test on the basis of granular short-term transition shocks suggests that the differentiated integration of sustainability information by funds has made network amplification less likely, although first-round losses can be material. On the other hand, there is room for fund managers and regulators to consider physical risk better and mitigate the second round effects it induces, as they are less efficiently absorbed by investment funds. Improving transparency and setting relevant industry standards in this context would help mitigate short-term financial stability risks.
Subjects: 
climate finance
investment funds
systemic risk
stress testing
JEL: 
C62
G23
G17
Q54
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-5469-3
Document Type: 
Working Paper

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