Default Risk of Money-Market Fund Portfolios

30 Pages Posted: 15 Jun 2016

See all articles by Matulya Bansal

Matulya Bansal

Columbia University - Columbia Business School

Date Written: December 02, 2015


We address the problem of quantifying the risk associated with money-market fund (MMF) portfolios. As MMFs are intended to be perpetual investment vehicles but hold short-maturity instruments, this problem presents some unique modeling challenges. By focusing on default risk, the most material driver of portfolio losses, and by using a constant level of risk assumption, we show how this problem is similar to that of pricing a collateralized debt obligation. Drawing upon this insight, we present a novel semianalytic approach to compute the default risk of MMF portfolios. Upon using this model to evaluate the portfolios of three of the largest prime MMFs, we find that they vary considerably in their default risk, which in our stylized model increases with the risk horizon. This suggests that to be effective and yet not punitive, any regulatory proposal (eg, establishing capital buffers, imposing liquidity fees, etc) to address the systemic risk posed by MMFs should be based on the riskiness of the MMF portfolios as well as their liquidation strategy.

Keywords: money-market fund (MMF), financial regulation, default risk, portfolio replenishment, collateralized debt obligation (CDO), pricing

Suggested Citation

Bansal, Matulya, Default Risk of Money-Market Fund Portfolios (December 02, 2015). Journal of Credit Risk, Vol. 11, No. 4, 2015. Available at SSRN:

Matulya Bansal (Contact Author)

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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