Guillaume Ouellet Leblanc is a Principal Economist in the Market Risks and Vulnerabilities Division of the Financial Markets Department. Prior to his current role, he held various positions in the Financial Stability and Funds Management and Banking departments. Guillaume holds a M.A. in Economics from the Catholic University of Louvain (Belgium) and the PRM designation.
How do Canadian corporate bond mutual funds meet investor redemptions? We revisit this question using decision tree and random forest algorithms. We uncover new patterns in the decisions made by fund managers: the interaction between a larger, market-wide term spread and relatively less-liquid holdings increases the probability that a fund manager will sell less-liquid assets (corporate bonds) to meet redemptions. The evidence also shows that machine learning algorithms can extract new knowledge that is not apparent using a classical linear modelling approach.
When investors redeem their fund shares for cash, fixed-income fund managers can choose whether to draw on their liquid holdings or sell bonds in the secondary market. We analyze the liquidity-management decisions of Canadian corporate bond mutual funds, focusing on the strategies they use to meet investor redemptions.
Canadian corporate bond mutual funds have rapidly increased in number and size in recent years. Their holdings have also become riskier, increasing their exposures to credit risk, interest rate risk and liquidity risk. We also briefly discuss financial stability implications.
The Bank’s internal credit risk assessment abilities are regularly enhanced. In this note, we present a recent innovation that extends the set of market-based indicators used in the credit risk assessment of financial counterparties.