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Market Efficiency and Money Market Fund Portfolio Managers: Beliefs versus Reality

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  • DeGennaro, Ramon P
  • Domian, Dale L

Abstract

This paper develops two models of the money market mutual fund maturity decision. The first assumes that markets are efficient but that transactions are costly. The second model relies on a survey of fund managers to select variables that might permit exploiting perceived profit opportunities. Empirical tests provide strong support for the former model but none for the latter. This can be interpreted as meaning that although managers may believe that financial markets are inefficient, margins are too small and competition too fierce for them to react aggressively on those beliefs. Any actions they do take to exploit alleged inefficiencies are not detectable in the data. In addition, the study finds that managers in the aggregate have no special ability to adjust their funds' maturity to capitalize on interest-rate changes. Copyright 1996 by MIT Press.

Suggested Citation

  • DeGennaro, Ramon P & Domian, Dale L, 1996. "Market Efficiency and Money Market Fund Portfolio Managers: Beliefs versus Reality," The Financial Review, Eastern Finance Association, vol. 31(2), pages 453-474, May.
    • Handle: RePEc:bla:finrev:v:31:y:1996:i:2:p:453-74
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    Cited by:

    1. G. Koppenhaver & Travis Sapp, 2005. "Money Funds or Markets? Valuing Intermediary Services," Journal of Financial Services Research, Springer;Western Finance Association, vol. 27(1), pages 51-76, February.
    2. Domian, Dale L. & Reichenstein, William, 1997. "Performance and persistence in money market fund returns," Financial Services Review, Elsevier, vol. 6(3), pages 169-183.
    3. Joseph Farinella & Randy Jorgensen, 2002. "Fee waivers for tax-exempt money market mutual funds," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 26(1), pages 31-49, March.
    4. Patrick E. McCabe, 2010. "The cross section of money market fund risks and financial crises," Finance and Economics Discussion Series 2010-51, Board of Governors of the Federal Reserve System (U.S.).
    5. Davis, Kevin, 2008. "Portfolio maturity choice of Australian cash management trusts," International Review of Financial Analysis, Elsevier, vol. 17(5), pages 1173-1185, December.

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