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Sophisticated and Unsophisticated Runs

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Abstract

What makes investors run? We show that during the March 2020 run on prime money market funds, institutional and retail investors behaved in dramatically different ways: sophisticated institutional investors ran preemptively based on fundamentals; unsophisticated retail investors ran based on herd-like informational spillovers, leaving funds belonging to families with large institutional outflows. We show that based on website traffic, institutional investors acquired more information on fund portfolios; furthermore, we show that within-family institutional outflows were informative to retail investors. Both investor types ran more if switching to a safer investment was cheaper, suggesting that safe-haven availability exacerbates run.

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  • Marco Cipriani & Gabriele La Spada, 2020. "Sophisticated and Unsophisticated Runs," Staff Reports 956, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:89274
    Note: Revised April 2024.
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    1. La Spada, Gabriele, 2018. "Competition, reach for yield, and money market funds," Journal of Financial Economics, Elsevier, vol. 129(1), pages 87-110.
    2. Marco Cipriani & Antoine Martin & Patrick E. McCabe & Bruno Parigi, 2014. "Gates, Fees, and Preemptive Runs," Liberty Street Economics 20140818, Federal Reserve Bank of New York.
    3. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    4. Marco Cipriani & Gabriele La Spada, 2017. "Investors’ appetite for money-like assets: the money market fund industry after the 2014 regulatory reform," Staff Reports 816, Federal Reserve Bank of New York.
    5. Patrick E. McCabe & Marco Cipriani & Michael Holscher & Antoine Martin, 2013. "The Minimum Balance at Risk: A Proposal to Mitigate the Systemic Risks Posed by Money Market Funds," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 44(1 (Spring), pages 211-278.
    6. Goldstein, Itay & Jiang, Hao & Ng, David T., 2017. "Investor flows and fragility in corporate bond funds," Journal of Financial Economics, Elsevier, vol. 126(3), pages 592-613.
    7. Ken Anadu & Steffanie Brady & Nathaniel R. Cooper, 2012. "The stability of prime money market mutual funds: sponsor support from 2007 to 2011," Supervisory Research and Analysis Working Papers RPA 12-3, Federal Reserve Bank of Boston.
    8. Marco Cipriani & Gabriele La Spada & Reed Orchinik & Aaron Plesset, 2020. "The Money Market Fund Liquidity Facility," Liberty Street Economics 20200508, Federal Reserve Bank of New York.
    9. Marco Cipriani & Andrew F. Haughwout & Benjamin Hyman & Anna Kovner & Gabriele La Spada & Matthew Lieber & Shawn Nee, 2020. "Municipal Debt Markets and the COVID-19 Pandemic," Liberty Street Economics 20200629, Federal Reserve Bank of New York.
    10. Marcin Kacperczyk & Philipp Schnabl, 2013. "How Safe Are Money Market Funds?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 128(3), pages 1073-1122.
    11. Sergey Chernenko & Adi Sunderam, 2014. "Frictions in Shadow Banking: Evidence from the Lending Behavior of Money Market Mutual Funds," Review of Financial Studies, Society for Financial Studies, vol. 27(6), pages 1717-1750.
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    Cited by:

    1. Kenechukwu E. Anadu & Pablo D. Azar & Catherine Huang & Marco Cipriani & Thomas M. Eisenbach & Gabriele La Spada & Mattia Landoni & Marco Macchiavelli & Antoine Malfroy-Camine & J. Christina Wang, 2023. "Runs and Flights to Safety: Are Stablecoins the New Money Market Funds?," Supervisory Research and Analysis Working Papers SRA 23-02, Federal Reserve Bank of Boston.
    2. repec:zbw:bofrdp:2021_002 is not listed on IDEAS
    3. Fernando Avalos & Dora Xia, 2021. "Investor size, liquidity and prime money market fund stress," BIS Quarterly Review, Bank for International Settlements, March.
    4. Dunne, Peter G. & Giuliana, Raffaele, 2021. "Do liquidity limits amplify money market fund redemptions during the COVID crisis?," ESRB Working Paper Series 127, European Systemic Risk Board.
    5. Capotă, Laura-Dona & Grill, Michael & Molestina Vivar, Luis & Schmitz, Niklas & Weistroffer, Christian, 2022. "Is the EU money market fund regulation fit for purpose? Lessons from the COVID-19 turmoil," Working Paper Series 2737, European Central Bank.
    6. Lugo, Stefano, 2023. "Cost of monitoring and risk taking in the money market funds industry," Journal of Financial Intermediation, Elsevier, vol. 53(C).
    7. Kenechukwu E. Anadu & Marco Cipriani & Ryan M. Craver & Gabriele La Spada, 2021. "COVID Response: The Money Market Mutual Fund Facility," Staff Reports 980, Federal Reserve Bank of New York.
    8. Järvenpää, Maija & Paavola, Aleksi, 2021. "Investor monitoring, money-likeness and stability of money market funds," Research Discussion Papers 2/2021, Bank of Finland.
    9. Xiaole Tong & Jingfei Wang, 2023. "Does the Development of Money Market Funds in China Increase the Bank Liquidity Risk?," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 13(1), pages 1-7.

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    More about this item

    Keywords

    runs; COVID-19; money market funds; sophisticated investors; regulation;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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