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The minimum balance at risk: a proposal to mitigate the systemic risks posed by money market funds

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  • Patrick E. McCabe
  • Marco Cipriani
  • Michael Holscher
  • Antoine Martin

Abstract

This paper advances the theory and methodology of signal extraction by introducing asymptotic and finite sample formulas for optimal estimators of signals in nonstationary multivariate time series. Previous literature has considered only univariate or stationary models. However, in current practice and research, econometricians, macroeconomists, and policy-makers often combine related series - that may have stochastic trends--to attain more informed assessments of basic signals like underlying inflation and business cycle components. Here, we use a very general model structure, of widespread relevance for time series econometrics, including flexible kinds of nonstationarity and correlation patterns and specific relationships like cointegration and other common factor forms. First, we develop and prove the generalization of the well-known Wiener-Kolmogorov formula that maps signal-noise dynamics into optimal estimators for bi-infinite series. Second, this paper gives the first explicit treatment of finite-length multivariate time series, providing a new method for computing signal vectors at any time point, unrelated to Kalman filter techniques; this opens the door to systematic study of near end-point estimators/filters, by revealing how they jointly depend on a function of signal location and parameters. As an illustration we present econometric measures of the trend in total inflation that make optimal use of the signal content in core inflation.

Suggested Citation

  • Patrick E. McCabe & Marco Cipriani & Michael Holscher & Antoine Martin, 2012. "The minimum balance at risk: a proposal to mitigate the systemic risks posed by money market funds," Finance and Economics Discussion Series 2012-47, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2012-47
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    References listed on IDEAS

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    1. Lyon, Andrew B, 1984. " Money Market Funds and Shareholder Dilution," Journal of Finance, American Finance Association, vol. 39(4), pages 1011-1020, September.
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    Cited by:

    1. Marco Cipriani & Antoine Martin & Bruno Parigi, 2013. "Money market funds intermediation, bank instability, and contagion," Staff Reports 599, Federal Reserve Bank of New York.
    2. Tobias Adrian & Adam B. Ashcraft, 2012. "shadow banking: a review of the literature," The New Palgrave Dictionary of Economics, Palgrave Macmillan.
    3. Bengtsson, E., 2013. "Fund Management and Systemic Risk - Lessons from the Global Financial Crisis," CITYPERC Working Paper Series 2013-06, Department of International Politics, City University London.
    4. Huberto M. Ennis, 2012. "Some theoretical considerations regarding net asset values for money market funds," Economic Quarterly, Federal Reserve Bank of Richmond, issue 4Q, pages 231-254.
    5. Tobias Adrian & Adam B. Ashcraft & Nicola Cetorelli, 2013. "Shadow bank monitoring," Staff Reports 638, Federal Reserve Bank of New York.
    6. Manmohan Singh, 2012. "Puts in the Shadow," IMF Working Papers 12/229, International Monetary Fund.
    7. Adrian, Tobias, 2014. "Financial stability policies for shadow banking," Staff Reports 664, Federal Reserve Bank of New York.
    8. Gallagher, Emily & Schmidt, Lawrence & Timmermann, Allan G & Wermers, Russ, 2017. "Transparency, Investor Information Acquisition, and Money Market Fund Risk Rebalancing during the 2011-12 Eurozone Crisis," CEPR Discussion Papers 11895, C.E.P.R. Discussion Papers.
    9. Eisenbach, Thomas M. & Keister, Todd & McAndrews, James J. & Yorulmazer, Tanju, 2014. "Stability of funding models: an analytical framework," Economic Policy Review, Federal Reserve Bank of New York, issue Feb, pages 29-47.

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