50 Pages Posted: 25 Feb 2011 Last revised: 13 Mar 2013
Date Written: March 12, 2013
We examine the risk-taking behavior of money market funds during the financial crisis of 2007-2010. We find that: (1) money market funds experienced an unprecedented expansion in their risk-taking opportunities; (2) funds had strong incentives to take on risk because fund inflows were highly responsive to fund yields; (3) funds sponsored by financial intermediaries with more money fund business took on more risk; (4) funds suffered runs as a result of their risk taking. This evidence suggests that money market funds lack safety because they have strong incentives to take on risk when the opportunity arises and are vulnerable to runs.
Keywords: Risk-Taking Incentives, Money Market Funds, Financial Conglomerates
JEL Classification: G20, G32, G33, G38, E53
Suggested Citation: Suggested Citation
Kacperczyk, Marcin T. and Schnabl, Philipp, How Safe are Money Market Funds? (March 12, 2013). Quarterly Journal of Economics, Forthcoming; AFA 2012 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1769025 or http://dx.doi.org/10.2139/ssrn.1769025
By Melanie Fein