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How Safe Are Money Market Funds?

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  • Marcin Kacperczyk
  • Philipp Schnabl

Abstract

We examine the risk-taking behavior of money market funds during the financial crisis of 2007--2010. We find that (1) money market funds experienced an unprecedented expansion in their risk-taking opportunities; (2) funds had strong incentives to take on risk because fund inflows were highly responsive to fund yields; (3) funds sponsored by financial intermediaries with more money fund business took on more risk; and (4) funds suffered runs as a result of their risk taking. This evidence suggests that money market funds lack safety because they have strong incentives to take on risk when the opportunity arises and are vulnerable to runs. JEL Codes: G21, G23, E44. Copyright 2013, Oxford University Press.

Suggested Citation

  • Marcin Kacperczyk & Philipp Schnabl, 2013. "How Safe Are Money Market Funds?," The Quarterly Journal of Economics, Oxford University Press, vol. 128(3), pages 1073-1122.
  • Handle: RePEc:oup:qjecon:v:128:y:2013:i:3:p:1073-1122
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    File URL: http://hdl.handle.net/10.1093/qje/qjt010
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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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