Transparency, Investor Information Acquisition, and Money Market Fund Risk Rebalancing During the 2011-12 Eurozone Crisis
68 Pages Posted: 16 Mar 2017
Date Written: March 2017
We study investor redemptions and portfolio rebalancing decisions of money market mutual funds (MMFs) during the Eurozone crisis. We exploit the multiple share class structure of the MMF industry and the detailed portfolio holdings disclosure required by 2010 regulatory changes to highlight costs and benefits of increased transparency in short-term funding markets. Consistent with theoretical predictions of models featuring costly (and incomplete) information acquisition, investors with the lowest information acquisition costs are most responsive to cross-sectional heterogeneity in funds' exposures to Eurozone securities. Moreover, managers catering to these investors disproportionately shift their portfolios away from the riskiest and most information-sensitive securities.
Keywords: endogenous information acquisition, eurozone crisis, financial fragility, Money market funds, transparency in short-term funding markets
JEL Classification: G01, G21, G23
Suggested Citation: Suggested Citation