Investor Information Acquisition and Money Market Fund Risk Rebalancing During the 2011-12 Eurozone Crisis

78 Pages Posted: 16 Dec 2016 Last revised: 26 Mar 2019

See all articles by Emily Gallagher

Emily Gallagher

University of Colorado at Boulder - Department of Finance; Federal Reserve Banks - Federal Reserve Bank of St. Louis

Lawrence Schmidt

MIT Sloan School of Management

Allan Timmermann

UCSD ; Centre for Economic Policy Research (CEPR)

Russ Wermers

University of Maryland - Robert H. Smith School of Business

Date Written: March 12, 2019

Abstract

We study investor redemptions and portfolio rebalancing decisions of prime money market mutual funds (MMFs) during the Eurozone crisis. We find that sophisticated investors selectively acquire information about MMFs’ risk exposures to Europe, which leads managers to withdraw funding from information-sensitive European issuers. That is, MMF managers, particularly those serving the most sophisticated investors, selectively adjust their portfolio risk exposures to avoid information-sensitive European risks, while maintaining or increasing risk exposures to other regions. This mechanism helps to explain the occurrence of selective “dry-ups” in debt markets where delegation is common and returns to information production are usually low.

Keywords: Money market funds, Eurozone crisis, financial fragility, endogenous information acqui- sition, transparency in short-term funding markets

JEL Classification: G01, G21, G23

Suggested Citation

Gallagher, Emily and Schmidt, Lawrence and Timmermann, Allan and Wermers, Russell R., Investor Information Acquisition and Money Market Fund Risk Rebalancing During the 2011-12 Eurozone Crisis (March 12, 2019). Robert H. Smith School Research Paper No. RHS 2886171. Available at SSRN: https://ssrn.com/abstract=2886171 or http://dx.doi.org/10.2139/ssrn.2886171

Emily Gallagher

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Lawrence Schmidt (Contact Author)

MIT Sloan School of Management ( email )

77 Massachusetts Avenue
Cambridge, MA 02139-4307
United States

HOME PAGE: http://https://sites.google.com/site/lawrencedwschmidt/home

Allan Timmermann

UCSD ( email )

9500 Gilman Drive
La Jolla, CA 92093-0553
United States
858-534-0894 (Phone)

HOME PAGE: http://rady.ucsd.edu/people/faculty/timmermann/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Russell R. Wermers

University of Maryland - Robert H. Smith School of Business ( email )

Department of Finance
College Park, MD 20742-1815
United States
301-405-0572 (Phone)
301-405-0359 (Fax)

HOME PAGE: http://www.rhsmith.umd.edu/finance/rwermers/

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