Implicit Guarantees and Risk Taking: Evidence from Money Market Funds

How Safe Are Money Market Funds?*

The Quarterly Journal of Economics ◽

10.1093/qje/qjt010 ◽

2013 ◽

Vol 128 (3) ◽

pp. 1073-1122 ◽

Cited By ~ 125

Author(s):

Marcin Kacperczyk ◽

Philipp Schnabl

Keyword(s):

Financial Crisis ◽

Risk Taking ◽

Money Market ◽

Financial Intermediaries ◽

Money Market Funds ◽

Risk Taking Behavior

Abstract We examine the risk-taking behavior of money market funds during the financial crisis of 2007–2010. We find that (1) money market funds experienced an unprecedented expansion in their risk-taking opportunities; (2) funds had strong incentives to take on risk because fund inflows were highly responsive to fund yields; (3) funds sponsored by financial intermediaries with more money fund business took on more risk; and (4) funds suffered runs as a result of their risk taking. This evidence suggests that money market funds lack safety because they have strong incentives to take on risk when the opportunity arises and are vulnerable to runs.

Download Full-text

Once Burned, Twice Shy: Money Market Fund Responses to a Systemic Liquidity Shock

Journal of Financial and Quantitative Analysis ◽

10.1017/s0022109015000101 ◽

2015 ◽

Vol 50 (1-2) ◽

pp. 119-144 ◽

Cited By ~ 20

Author(s):

Philip E. Strahan ◽

Başak Tanyeri

Keyword(s):

Risk Taking ◽

Money Market ◽

Asset Sales ◽

Portfolio Risk ◽

Liquidity Shocks ◽

Money Market Funds ◽

Increase Risk ◽

The Government ◽

Liquidity Shock ◽

Reduced Risk

AbstractAfter Lehman’s collapse in 2008, investors ran from risky money market funds. In 27 funds, outflows overwhelmed cash inflows, thus forcing asset sales. These funds sold their safest and most liquid holdings. Funds were thus left with riskier and longer maturity assets. Over the subsequent quarter, however, the hard-hit funds reduced risk more than other funds. In contrast, money funds hit by idiosyncratic liquidity shocks before Lehman did not alter portfolio risk. The result suggests that moral hazard concerns with the Treasury Guarantee of investor claims did not increase risk taking. Funds that benefited most from the government bailout reduced risk.

Download Full-text

The SECs Attempted Use Of Money Market Mutual Fund Shadow Prices To Control Risk Taking By Money Market Mutual Funds

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v10i6.7025 ◽

2012 ◽

Vol 10 (6) ◽

pp. 345

Author(s):

Larry G. Locke ◽

Virginia R. Locke

Keyword(s):

Mutual Funds ◽

Risk Taking ◽

Shadow Price ◽

Market Value ◽

Money Market ◽

Policy Implications ◽

Share Price ◽

Shadow Prices ◽

Money Market Funds ◽

Money Market Mutual Funds

One of the major advantages of money market mutual funds as a short term cash investment vehicle is that they are always purchased and sold for $1 per share. That constant $1 share price is maintained, despite the obvious fact that the funds holdings are frequently changing value, through a permissive SEC regulation that entitles money funds to value their portfolio securities at amortized cost rather than market value. At the same time, funds have always monitored their true market value in what is referred to as the funds shadow price, disclosed on a semi-annual basis. Starting in December, 2010, the SEC ordered money funds to publish their shadow prices monthly in hopes that investors would take notice and provide market discipline to money funds that failed to keep the funds market value sufficiently close to $1 per share. The expressed intention of the SEC was that investors would restrain money market fund managers from taking undue risks. This study analyzes whether the SECs strategy is working. By assessing the relationship between money market funds shadow prices and subsequent changes in net assets, the authors can look for evidence of whether the market is performing the function the SEC intends. The authors have examined monthly disclosures of shadow prices and asset changes for over 100 money market funds since the funds commenced reporting. Through a series of linear regression analyses, the authors have found no relevant correlation between money funds shadow prices and investor activity. The ramifications of this lack of correlation are potentially significant, particularly now as financial regulators are concerned that money fund holdings of European banks might transmit the current credit deterioration in Greece to U.S. markets. The SEC and other financial regulators are counting on disclosure of shadow prices as a tool to avoid the kind of risk taking that ultimately contributed to the credit market freeze experienced in 2008. If that tool is, in fact, not working, the SEC may be obliged to attempt alternative strategies. The authors discuss the policy implications of their findings.

Download Full-text