Market Efficiency and Money Market Fund Portfolio Managers: Beliefs Versus Reality

Abstract:     
This paper develops two models of the money market
mutual fund maturity decision. The first assumes that
markets are efficient but that transactions are costly. The
second model relies on a survey of fund managers to select
variables that might permit exploiting perceived
profit opportunities. Empirical tests provide strong support
for the former model, but none for the latter. This
can be interpreted as meaning that although managers
may believe that financial markets are inefficient, margins
are too small and competition too fierce for them to
act aggressively on those beliefs. Any actions they do
take to exploit alleged inefficiencies are not detectable in
the data. In addition, the study finds that managers in
the aggregate have no special ability to adjust their funds'
maturity to capitalize on interest-rate changes.

JEL Classification: G1, G2, G0, E4, D4, C5

Accepted Paper Series