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Sophisticated and Unsophisticated Runs

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  • Marco Cipriani
  • Gabriele La Spada

Abstract

This paper characterizes the run behavior of sophisticated (institutional) and unsophisticated (retail) investors by studying the runs on prime money market funds (MMFs) of March 2020, at the beginning of the COVID-19 pandemic. For both U.S. and European institutional prime MMFs, the runs were more severe in funds for which the imposition of redemption gates and fees was a material possibility because of their lower liquidity positions. In contrast, although U.S. retail prime MMFs are also required to adopt the same system of gates and fees, their outflows did not depend on fund liquidity; unsophisticated (retail) investors ran more often if their funds belonged to a family offering institutional prime MMFs and suffering larger institutional redemptions. Finally, across investor types, MMFs belonging to families with a larger offering of government MMFs experienced larger outflows; this result is consistent with lower switching costs in fund families that are more specialized in government funds.

Suggested Citation

  • Marco Cipriani & Gabriele La Spada, 2020. "Sophisticated and Unsophisticated Runs," Staff Reports 956, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:89274
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    References listed on IDEAS

    as
    1. La Spada, Gabriele, 2018. "Competition, reach for yield, and money market funds," Journal of Financial Economics, Elsevier, vol. 129(1), pages 87-110.
    2. Goldstein, Itay & Jiang, Hao & Ng, David T., 2017. "Investor flows and fragility in corporate bond funds," Journal of Financial Economics, Elsevier, vol. 126(3), pages 592-613.
    3. Marco Cipriani & Antoine Martin & Patrick E. McCabe & Bruno Parigi, 2014. "Gates, Fees, and Preemptive Runs," Liberty Street Economics 20140818, Federal Reserve Bank of New York.
    4. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    5. Ken Anadu & Steffanie Brady & Nathaniel R. Cooper, 2012. "The stability of prime money market mutual funds: sponsor support from 2007 to 2011," Supervisory Research and Analysis Working Papers RPA 12-3, Federal Reserve Bank of Boston.
    6. , 2020. "The Money Market Fund Liquidity Facility," Liberty Street Economics 20200508, Federal Reserve Bank of New York.
    7. , 2020. "Municipal Debt Markets and the COVID-19 Pandemic," Liberty Street Economics 20200629, Federal Reserve Bank of New York.
    8. 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.
    9. 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.
    10. 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.
    11. 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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    More about this item

    Keywords

    runs; COVID-19; money market funds; sophisticated investors; regulation;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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