Mutual fund stress test spooking market, no scientific basis: Former Sebi official

Sebi-enforced stress tests of various smallcap and mutual fund schemes are unnecessarily spooking the market as there is no scientific basis for the calculations being done by fund houses, Sebi’s former executive director and top lawyer Sandeep Parekh said.

“It assumes liquidity to be a constant at best and extrapolates the past into the future at worst. If liquidity actually vanishes in a particular stock, it can just vanish not in 6 days or 14 days or whatever other metric is used – it will vanish in a microsecond. Analysis by extrapolation may or may not work. Yes, liquidity is often higher with higher volatility – but it’s not a given,” Parekh said on X.

He asserted that it is not the job of the regulator to predict either market levels (no matter how well-meaning, even accurate) or liquidity (which can’t be predicted).