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Sturm und Drang in money market funds: when money market funds cease to be narrow

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  • Jank, Stephan
  • Wedow, Michael

Abstract

This paper investigates the returns and flows of German money market funds before and during the liquidity crisis of 2007/2008. The main findings of this paper are: In liquid times money market funds enhanced their returns by investing in less liquid papers. By doing so they outperformed other funds as long as liquidity in the market was high. Investing in less liquid assets, however, widens the narrow structure of money market funds and makes them vulnerable to runs. During the shortening of liquidity caused by the subprime crisis illiquid funds experienced runs, while more liquid funds functioned as a safe haven. --

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Bibliographic Info

Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 2: Banking and Financial Studies with number 2008,20.

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Date of creation: 2008
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Handle: RePEc:zbw:bubdp2:200820

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Related research

Keywords: Money market funds; liquidity crisis; strategic complementarities; runs; narrow banking;

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References

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  1. Pennacchi, George, 2006. "Deposit insurance, bank regulation, and financial system risks," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 1-30, January.
  2. Geoffrey P. Miller, 1998. "On the Obsolescence of Commercial Banking," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 154(1), pages 61-, March.
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Cited by:
  1. Wermers, Russ, 2012. "Runs on money market mutual funds," CFR Working Papers 12-05, University of Cologne, Centre for Financial Research (CFR).
  2. Jonathan Witmer, 2012. "Does the Buck Stop Here? A Comparison of Withdrawals from Money Market Mutual Funds with Floating and Constant Share Prices," Working Papers 12-25, Bank of Canada.
  3. Jank, Stephan, 2011. "Mutual fund flows, expected returns, and the real economy," CFR Working Papers 11-04, University of Cologne, Centre for Financial Research (CFR).
  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. Fecht, Falko & Wedow, Michael, 2009. "The dark and the bright side of liquidity risks: evidence from open-end real estate funds in Germany," Discussion Paper Series 2: Banking and Financial Studies 2009,10, Deutsche Bundesbank, Research Centre.

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