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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 University of Cologne, Centre for Financial Research (CFR) in its series CFR Working Papers with number 10-16.

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Date of creation: 2010
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Handle: RePEc:zbw:cfrwps:1016

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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, 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, Mohr Siebeck, Tübingen, vol. 154(1), pages 61-, March.
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Cited by:
  1. Jank, Stephan, 2012. "Mutual fund flows, expected returns, and the real economy," Journal of Banking & Finance, Elsevier, Elsevier, vol. 36(11), pages 3060-3070.
  2. Patrick E. McCabe, 2010. "The cross section of money market fund risks and financial crises," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2010-51, Board of Governors of the Federal Reserve System (U.S.).
  3. Fecht, Falko & Wedow, Michael, 2014. "The dark and the bright side of liquidity risks: Evidence from open-end real estate funds in Germany," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 23(3), pages 376-399.
  4. 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, Bank of Canada 12-25, Bank of Canada.
  5. Wermers, Russ, 2012. "Runs on money market mutual funds," CFR Working Papers 12-05, University of Cologne, Centre for Financial Research (CFR).

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