Can Redemption Fees Prevent Runs on Funds?
66 Pages Posted: 25 Jun 2024 Last revised: 16 Oct 2024
Date Written: June 21, 2024
Abstract
We ask whether imposing fees on redeeming investors can prevent runs on money market mutual funds (MMFs) and related intermediation arrangements. We first show that imposing a fee only in extraordinary times often leaves the fund susceptible to a preemptive run where investors rush to withdraw before the fee applies. We then show how a policy that imposes a fee when current redemption demand is above a threshold, even in normal times, can make the fund run-proof. We characterize the best run-proof policy within a general class and within a class of simple policies. We also study robust policies that are run-proof for a range of parameter values. Compared to the reform adopted in the U.S. in 2023, the best simple, robust policy involves a smaller fee and a lower threshold.
Suggested Citation: Suggested Citation
Huang, Xuesong and Keister, Todd, Can Redemption Fees Prevent Runs on Funds? (June 21, 2024). Available at SSRN: https://ssrn.com/abstract=4873088 or http://dx.doi.org/10.2139/ssrn.4873088
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