Once Burned, Twice Shy: Money Market Fund Responses to a Systemic Liquidity Shock

40 Pages Posted: 5 Oct 2012

See all articles by Philip E. Strahan

Philip E. Strahan

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Başak Tanyeri

Bilkent University

Date Written: July 3, 2012

Abstract

In the immediate aftermath of the Lehman collapse, investors ran from risky money market funds. In 27 of them, outflows were large enough to overwhelm cash inflows from maturing assets, thus forcing asset sales. We find that these money funds responded by selling their safest and most liquid holdings. As a result, funds were left holding higher risk and longer maturity assets than desired. Over the subsequent quarter, however, the hard-hit funds reduced risk more than other funds, relative to their initial holdings before the crisis. In contrast, money funds hit by idiosyncratic liquidity shocks before the Lehman crisis did not alter portfolio risk. The result suggests that moral hazard concerns associated with the Treasury Guarantee of money market investor claims did not lead to increased risk taking. Rather than increase risk, funds that benefitted most from the government bailout reduced risk.

Keywords: money market runs

JEL Classification: G24, G28

Suggested Citation

Strahan, Philip E. and Tanyeri, Başak, Once Burned, Twice Shy: Money Market Fund Responses to a Systemic Liquidity Shock (July 3, 2012). Available at SSRN: https://ssrn.com/abstract=2156257 or http://dx.doi.org/10.2139/ssrn.2156257

Philip E. Strahan

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States
617-552-6430 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://www2.bc.edu/~strahan

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Başak Tanyeri (Contact Author)

Bilkent University ( email )

06533 Bilkent, Ankara
Turkey
903122901871 (Phone)

HOME PAGE: http://www.bilkent.edu.tr/~basak

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