Liquidity stress testing for investment funds: Insights from Vietnam

Abstract

This research aims to assess the liquidity stress and resilience of investment funds in Vietnam by applying advanced risk modeling techniques, Specifically, value at risk (VaR) and expected shortfall (ES). The study systematically evaluates fund-specific liquidity vulnerabilities and the adequacy of liquidity buffers across different fund types using comprehensive monthly data from 2013 to 2021. The empirical findings reveal substantial variations in liquidity stress exposure with bonds funds and exchange-traded funds (ETFs) demonstrating significantly higher resilience against redemption shocks compared to traditional open-ended equity funds. These differences are mainly attributed to the inherent liquidity profiles of their underlying portfolios and the operational structures of each fund category. Additionally, the analysis identifies that some funds hold excessive liquidity reserves, indicating potential capital inefficiencies. While this conservative approach may mitigate short-term liquidity risks, it also results in suboptimal capital utilization, suggesting an essential trade-off between liquidity preparedness and return maximization. The research underscores the importance of integrating liquidity stress testing into regular fund management practices in Vietnam. The study provides practical implications for fund managers and regulators, especially within frontier and emerging markets where liquidity risk frameworks remain underdeveloped by adapting a tailored, robust liquidity stress testing model specifically adapted to Vietnam’s investment fund.