The paper develops a system-wide stress testing model designed for the market-based financial system. The model includes banks, which intermediate markets, as well as important holders of assets, such as insurers, pension funds and several types of investment funds. The work applies the model to the euro-area market-based financial system during the March 2020 turmoil caused by Covid.
Shock amplification is mainly due to the behaviour of open-ended funds that, given insufficient liquidity buffers, must sell corporate bonds and equities to meet investor redemption requests, thereby depressing asset prices. In all the simulations, banks and insurers show a good degree of resilience to shocks and limit their price impact.