With these liquidity conditions, initial asset price adjustments would be amplified, triggering further redemptions and margin calls, thereby fuelling such negative liquidity spirals. The market impact of large-scale outflows could be aggravated by strategic complementarities among fund investors, in particular, resulting from first mover advantages and asset managers being forced to adjust portfolios in a timely manner.
Market impact of investment funds is potentially strong, in particular for the euro area secondary bond markets, as investment funds hold a substantial and growing proportion of the debt securities of euro area banks, governments and non-financial corporates. Liquidity and maturity transformation outside the regulated perimeter have been further spreading risks across institutions and countries during the global crisis.