The Effect of Private Fund Expansion on Financial Stability

Yi, Junesuh

doi:2020.49.6.777

Korean J Financ Stud > Volume 49(6); 2020 > Article

Article

Korean Journal of Financial Studies 2020;49(6):777-809.
DOI: https://doi.org/10.26845/KJFS.2020.12.49.6.777 Published online December 31, 2020.

The Effect of Private Fund Expansion on Financial Stability

Junesuh Yi

Professor, Dongguk University

사모펀드 성장이 금융안정에 미치는 영향

이준서

동국대학교 교수

Correspondence: Junesuh Yi, Tel: +82-2-2260-8589, Fax: +82-2-2260-3684,
Email: jsyieee@gmail.com

Received: 23 July 2020 • Revised: 25 October 2020 • Accepted: 2 November 2020

Abstract

This study examines the effect of the expansion of the private fund market on financial stability. Specifically, it analyzes the effect of private fund growth on financial markets’ as well as financial institutions’ returns and on financial stability indicators. Overall, the expansion of the private fund market is found to have a negative effect on the financial market, which varies depending on the fund type. The increase in private fund deteriorates the returns on the stock and alternative investment markets. In addition, the growth of private funds is observed to have a negative effect on financial stability. The expansion ratio in private funds is positively correlated with the Financial Stability Index (FSI) and joint probability of default (JPoD), and has a statistically significant effect on the JPoD growth rate. By fund type, the increase in real estate and special asset funds amplify the increase in FSI growth rate, whereas the increase in bond funds lead to a decrease in all financial stability indicators, helping to maintain financial stability. Consequently, the result raises policy implications that it is necessary to apply a separate management method for each type of private fund.

Key Words: Private Fund, Financial Stability, Systemic Risk, JPoD, Financial Stability Indicator