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Investors’ appetite for money-like assets: the money market fund industry after the 2014 regulatory reform

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  • Marco Cipriani
  • Gabriele La Spada

Abstract

This paper uses a quasi-natural experiment to estimate the premium investors are willing to pay to hold money-like assets. The 2014 SEC reform of the money market fund (MMF) industry reduced the money-likeness only of prime MMFs, by increasing the information sensitivity of their shares, and left government MMFs unaffected. As a result, investors fled from prime to government MMFs, with total outflows exceeding $1 trillion. By comparing investors? response to the regulatory change with past episodes of industry dislocation (for example, the 2008 MMF run), we highlight the difference between a desire to preserve money-likeness and a simple flight to safety. Using a difference-in-differences design that exploits the differential treatment of prime and government MMFs, as well as institutional and retail share classes, we estimate the premium for money-likeness to be 20 basis points for retail investors and 28 basis points for institutional ones (who have been more affected by the regulation). Using family specialization as an instrument for fund yields, we are able to identify the elasticity of substitution between prime and government institutional MMF shares: the regulation caused the elasticity to decrease from 0.50 to 0.11.

Suggested Citation

  • Marco Cipriani & Gabriele La Spada, 2017. "Investors’ appetite for money-like assets: the money market fund industry after the 2014 regulatory reform," Staff Reports 816, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:816
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    References listed on IDEAS

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    1. Samuel G Hanson & David S Scharfstein & Adi Sunderam, 2015. "An Evaluation of Money Market Fund Reform Proposals," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 63(4), pages 984-1023, November.
    2. 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.
    3. Patrick E. McCabe & Marco Cipriani & Michael Holscher & Antoine Martin, 2013. "The Minimum Balance at Risk: A Proposal to Mitigate the Systemic Risks Posed by Money Market Funds," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 44(1 (Spring), pages 211-278.
    4. Sergey Chernenko & Adi Sunderam, 2014. "Frictions in Shadow Banking: Evidence from the Lending Behavior of Money Market Mutual Funds," Review of Financial Studies, Society for Financial Studies, vol. 27(6), pages 1717-1750.
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    Cited by:

    1. 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.
    2. David B. Cashin & Erin E. Syron Ferris & Elizabeth C. Klee, 2020. "Treasury Safety, Liquidity, and Money Premium Dynamics: Evidence from Recent Debt Limit Impasses," Finance and Economics Discussion Series 2020-008, Board of Governors of the Federal Reserve System (U.S.).
    3. Tri Vi Dang & Gary B. Gorton & Bengt R. Holmstrom, 2019. "The Information View of Financial Crises," NBER Working Papers 26074, National Bureau of Economic Research, Inc.
    4. Marco Cipriani & Gabriele La Spada, 2020. "Sophisticated and Unsophisticated Runs," Staff Reports 956, Federal Reserve Bank of New York.
    5. Allen, Kyle D. & Winters, Drew B., 2020. "Crisis regulations: The unexpected consequences of floating NAV for money market funds," Journal of Banking & Finance, Elsevier, vol. 117(C).

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    More about this item

    Keywords

    money market funds; money market funds reform _________________; money-like assets; information sensitivity;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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