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

68 Pages Posted: 16 Mar 2017

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 2017

Abstract

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

Gallagher, Emily and Schmidt, Lawrence and Timmermann, Allan and Wermers, Russell R., Transparency, Investor Information Acquisition, and Money Market Fund Risk Rebalancing During the 2011-12 Eurozone Crisis (March 2017). CEPR Discussion Paper No. DP11895. Available at SSRN: https://ssrn.com/abstract=2934207

Emily Gallagher (Contact Author)

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

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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