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

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