10 Pages Posted: 19 Jan 2011 Last revised: 20 Feb 2012
Date Written: January 14, 2011
The current stable-NAV model for prime money market funds exposes fund investors and systemically important borrowers to runs like those that occurred after the failure of Lehman in September 2008. This working paper, by the Squam Lake Group, argues that, to reduce this risk, funds should have either floating NAVs or buffers provided by their sponsors that can absorb losses up to a level to be set by regulators. We suggest alternative designs for such a buffer, as well as considerations that should be taken into account when determining its required size.
Suggested Citation: Suggested Citation
Baily, Martin N. and Campbell, John Y. and Cochrane, John H. and Diamond, Douglas W. and Duffie, Darrell and French, Kenneth R. and Kashyap, Anil K. and Mishkin, Frederic S. and Scharfstein, David S. and Shiller, Robert J. and Slaughter, Matthew J. and Shin, Hyun Song and Stein, Jeremy C. and Stulz, René M., Reforming Money Market Funds (January 14, 2011). Tuck School of Business Working Paper No. 2011-86; Rock Center for Corporate Governance at Stanford University Working Paper No. 109; Columbia Business School Research Paper No. 12-13. Available at SSRN: https://ssrn.com/abstract=1740663 or http://dx.doi.org/10.2139/ssrn.1740663
By Eugene Fama