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Liability Structure and Risk-Taking: Evidence from the Money Market Fund Industry

Author

Listed:
  • Baghai, Ramin P.
  • Giannetti, Mariassunta
  • Jager, Ivika

Abstract

We exploit a change in regulation of money market funds to investigate how the structure of liabilities impacts financial intermediaries' asset holdings. We show that following a change in regulation, which has made prime money market funds' liabilities less money-like, safer funds exited the industry. The remaining funds have increased the riskiness of their portfolios, possibly in response to an increase in the sensitivity of flows to performance. As a result, issuers with lower risk of default have less access to funding from US money market funds. To the best of our knowledge, our paper provides the first evidence in support of theories highlighting that the characteristics of financial intermediaries' assets and liabilities are jointly determined.

Suggested Citation

  • Baghai, Ramin P. & Giannetti, Mariassunta & Jager, Ivika, 2018. "Liability Structure and Risk-Taking: Evidence from the Money Market Fund Industry," CEPR Discussion Papers 13151, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:13151
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    References listed on IDEAS

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    1. Holmström, Bengt, 2013. "Inside and Outside Liquidity," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262518536, January.
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    More about this item

    Keywords

    Fund exit; liquidity; Money market funds; Money-ness; regulation; Risk Taking;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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