Prime Time for Prime Funds: Floating NAV, Intraday Redemptions and Liquidity Risk During Crises

71 Pages Posted: 12 Aug 2020 Last revised: 13 May 2022

See all articles by Lorenzo Casavecchia

Lorenzo Casavecchia

University of Technology Sydney

Georgina Ge

Macquarie University - Department of Applied Finance and Actuarial Studies

C. Wei Li

University of Iowa

Ashish Tiwari

University of Iowa

Date Written: August 11, 2020

Abstract

This paper offers a first look at a recent innovation, namely, mutual funds offering intraday share redemptions. This novel design feature emerged following the adoption of floating net asset values by prime institutional money market funds in October 2016. Consistent with a theoretical model, we find that funds offering multiple intraday NAVs and redemption windows maintain higher liquidity buffers but are exposed to significantly larger outflows during periods of stress, compared to funds offering end-of-day NAVs/redemptions. Our analysis covers (1) the COVID-19 shock of March 2020, and (2) the near-default of U.S. debt during the debt ceiling crisis of 2018.

Keywords: Prime Money Market Funds, Intraday Redemptions, Floating NAV, Liquidity Risk, Covid-19, Debt Ceiling Crisis

JEL Classification: G01, G18, G23, G28

Suggested Citation

Casavecchia, Lorenzo and Ge, Chanyuan and Li, C. Wei and Tiwari, Ashish, Prime Time for Prime Funds: Floating NAV, Intraday Redemptions and Liquidity Risk During Crises (August 11, 2020). Available at SSRN: https://ssrn.com/abstract=3671972 or http://dx.doi.org/10.2139/ssrn.3671972

Lorenzo Casavecchia

University of Technology Sydney ( email )

8 Ultimo Rd
Sydney, NSW 2007
Australia

Chanyuan Ge

Macquarie University - Department of Applied Finance and Actuarial Studies ( email )

Eastern Rd.
North Ryde
Sydney, NSW 2109
United States

C. Wei Li

University of Iowa ( email )

Finance Department
Henry B. Tippie College of Business
Iowa City, IA 52242-1097
United States
319-335-0911 (Phone)
3193353690 (Fax)

Ashish Tiwari (Contact Author)

University of Iowa ( email )

Finance Department
Henry B. Tippie College of Business, 108 PBB
Iowa City, IA 52242
United States
(319) 353-2185 (Phone)
(319) 335-3690 (Fax)

HOME PAGE: https://tippie.uiowa.edu/people/ashish-tiwari

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