How Safe are Money Market Funds?
Marcin T. Kacperczyk
Imperial College London - Accounting, Finance, and Macroeconomics; National Bureau of Economic Research (NBER)
New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
March 12, 2013
Quarterly Journal of Economics, Forthcoming
AFA 2012 Chicago Meetings Paper
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.
Number of Pages in PDF File: 50
Keywords: Risk-Taking Incentives, Money Market Funds, Financial Conglomerates
JEL Classification: G20, G32, G33, G38, E53
Date posted: February 25, 2011 ; Last revised: March 13, 2013