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Competition, reach for yield, and money market funds

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  • La Spada, Gabriele

Abstract

Do asset managers reach for yield because of competitive pressures in a low rate environment? I propose a tournament model of money market funds (MMFs) to study this question. When funds care about relative performance, an increase in the risk premium leads funds with lower default costs to increase risk taking, while funds with higher default costs decrease risk taking. Without changes in the premium, lower risk-free rates reduce the risk taking of all funds. I show that these predictions are consistent with MMF risk taking during the 2002–2008 period and that rank-based performance is a key determinant of money flows to MMFs.

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  • La Spada, Gabriele, 2018. "Competition, reach for yield, and money market funds," Journal of Financial Economics, Elsevier, vol. 129(1), pages 87-110.
    • Handle: RePEc:eee:jfinec:v:129:y:2018:i:1:p:87-110
    DOI: 10.1016/j.jfineco.2018.04.006
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    2. Huberto M. Ennis & Jeffrey M. Lacker & John A. Weinberg, 2023. "Money Market Fund Reform: Dealing with the Fundamental Problem," JRFM, MDPI, vol. 16(1), pages 1-14, January.
    3. Cipriani, Marco & La Spada, Gabriele, 2021. "Investors’ appetite for money-like assets: The MMF industry after the 2014 regulatory reform," Journal of Financial Economics, Elsevier, vol. 140(1), pages 250-269.
    4. Baghai, Ramin P. & Giannetti, Mariassunta & Jäger, Ivika, 2022. "Liability Structure and Risk Taking: Evidence from the Money Market Fund Industry," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 57(5), pages 1771-1804, August.
    5. Gara Afonso & Marco Cipriani & Adam Copeland & Anna Kovner & Gabriele La Spada & Antoine Martin, 2021. "The Market Events of Mid-September 2019," Economic Policy Review, Federal Reserve Bank of New York, vol. 27(2), pages 1-26, August.
    6. Marco Cipriani & Gabriele La Spada, 2020. "Sophisticated and Unsophisticated Runs," Staff Reports 956, Federal Reserve Bank of New York.
    7. repec:zbw:bofrdp:2021_002 is not listed on IDEAS
    8. Fricke, Daniel & Greppmair, Stefan & Paludkiewicz, Karol, 2022. "You can't always get what you want (where you want it): Cross-border effects of the US money market fund reform," Discussion Papers 03/2022, Deutsche Bundesbank.
    9. Ye Li & Simon Mayer & Simon Mayer, 2021. "Money Creation in Decentralized Finance: A Dynamic Model of Stablecoin and Crypto Shadow Banking," CESifo Working Paper Series 9260, CESifo.
    10. Sirio Aramonte & Andreas Schrimpf & Hyun Song Shin, 2023. "Non-bank financial intermediaries and financial stability," Chapters, in: Refet S. Gürkaynak & Jonathan H. Wright (ed.), Research Handbook of Financial Markets, chapter 7, pages 147-170, Edward Elgar Publishing.
    11. Tim A Kroencke & Maik Schmeling & Andreas Schrimpf, 2015. "Global Asset Allocation Shifts," BIS Working Papers 497, Bank for International Settlements.
    12. Li, Yi, 2021. "Reciprocal lending relationships in shadow banking," Journal of Financial Economics, Elsevier, vol. 141(2), pages 600-619.
    13. Lugo, Stefano, 2023. "Cost of monitoring and risk taking in the money market funds industry," Journal of Financial Intermediation, Elsevier, vol. 53(C).
    14. Järvenpää, Maija & Paavola, Aleksi, 2021. "Investor monitoring, money-likeness and stability of money market funds," Research Discussion Papers 2/2021, Bank of Finland.
    15. Nicola Cetorelli & Gabriele La Spada & João A. C. Santos, 2022. "Monetary Policy, Investor Flows, and Loan Fund Fragility," Staff Reports 1008, Federal Reserve Bank of New York.
    16. Linus Wilson, 2020. "Broken bucks: money funds that took taxpayer guarantees in 2008," Journal of Asset Management, Palgrave Macmillan, vol. 21(5), pages 375-392, September.

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    More about this item

    Keywords

    Reach for yield; Money market funds; Flow-performance relation; Tournament; Monetary policy;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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