Hostname: page-component-78c5997874-4rdpn Total loading time: 0 Render date: 2024-11-15T20:28:22.976Z Has data issue: false hasContentIssue false
  • English
  • Français

Liability Structure and Risk Taking: Evidence from the Money Market Fund Industry

Published online by Cambridge University Press:  18 June 2021

Ramin P. Baghai ,
Mariassunta Giannetti Open the ORCID record for Mariassunta Giannetti [Opens in a new window]  and
Ivika Jäger
Ramin P. Baghai
Affiliation:
Stockholm School of Economics, Centre for Economic Policy Research (CEPR), and European Corporate Governance Institute (ECGI) ramin.baghai@hhs.se
Mariassunta Giannetti*
Affiliation:
Stockholm School of Economics, CEPR, and ECGI
Ivika Jäger
Affiliation:
Aalto University School of Business ivika.jager@aalto.fi
*
mariassunta.giannetti@hhs.se (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

How does the structure of financial intermediaries’ liabilities affect their asset holdings? We investigate the consequences of the 2014 money market fund (MMF) reform, which imposed redemption gates and liquidity fees on prime MMFs and forced prime funds marketed to institutional investors to switch from constant to floating net asset value. These changes made prime MMFs’ liabilities less money-like. As a consequence, the affected MMFs experienced an increase in flow–performance sensitivity and started taking more risks. In addition, the total funding provided by MMFs to the corporate sector, and especially to safer issuers, has decreased.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 5 , August 2022 , pp. 1771 - 1804
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted re-use, distribution, and reproduction in any medium, provided the original work is properly cited.
Copyright
© The Author(s), 2021. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We are grateful for comments and suggestions made by Jack Bao, Sergey Chernenko, Jennifer Conrad (the editor), Marco Di Maggio, Emily Gallagher (the referee), Javier Gil-Bazo, Gary Gorton, Pekka Honkanen, Wei Jiang, Veronika Pool, Otto Toivanen, and Malcom Wardlaw. We also thank seminar and conference participants at the 2nd World Symposium on Investment Research, the 2018 European Finance Association Meetings, the 2019 Western Finance Association Meetings, the 2019 Financial Intermediation Research Society Meetings, the University of Maryland and Federal Reserve Board Third Conference on Short-Term Funding Markets, the Banque de France, the University of Bristol, the University of Exeter, the University of Zurich, the 2018 EuroFIT Workshop, the Bank of Finland/CEPR conference “Money in the Digital Age,” the European Central Bank workshop “Money Markets, Monetary Policy Implementation, and Central Bank Balance Sheets,” the European Central Bank workshop “Monetary Policy, Macroprudential Policy and Financial Stability,” and the First Endless Summer Conference on Financial Intermediation and Corporate Finance for helpful comments. Baghai acknowledges financial support from the Nasdaq Nordic Foundation. Giannetti acknowledges financial support from the Bank of Sweden Tercentenary Foundation. Jäger acknowledges financial support from the Jacob Palmstiernas Foundation. The authors have no relevant or material financial interests that relate to the research described in this article.

References

Chen, Q.; Goldstein, I.; and Jiang, W.. “Payoff Complementarities and Financial Fragility: Evidence from Mutual Fund Outflows.” Journal of Financial Economics, 97 (2010), 239–262.CrossRefGoogle Scholar
Chernenko, S., and Sunderam, A.. “Frictions in Shadow Banking: Evidence from the Lending Behavior of Money Market Mutual Funds.” Review of Financial Studies, 27 (2014), 1717–1750.CrossRefGoogle Scholar
Chevalier, J., and Ellison, G.. “Risk Taking by Mutual Funds as a Response to Incentives.” Journal of Political Economy, 105 (1997), 1167–1200.CrossRefGoogle Scholar
Cipriani, M., and La Spada, G.. “Investors’ Appetite for Money-Like Assets: The Money Market Fund Industry After the 2014 Regulatory Reform.” Journal of Financial Economics, 140 (2021), 250–269.CrossRefGoogle Scholar
Di Maggio, M., and Kacperczyk, M.. “The Unintended Consequences of the Zero Lower Bound Policy.” Journal of Financial Economics, 123 (2017), 59–80.CrossRefGoogle Scholar
Duan, J.-C.; Sun, J.; and Wang, T.. “Multiperiod Corporate Default Prediction—a Forward Intensity Approach.” Journal of Econometrics, 170 (2012), 191–209.CrossRefGoogle Scholar
Epanechnikov, V. A. “Non-Parametric Estimation of a Multivariate Probability Density.” Theory of Probability and Its Applications, 14 (1969), 153–158.CrossRefGoogle Scholar
Fan, J., and Gijbels, I.. Local Polynomial Modelling and Its Applications: Monographs on Statistics and Applied Probability 66. London, England: Chapman & Hall, (1996).Google Scholar
Franzoni, F., and Giannetti, M.. “Costs and Benefits of Financial Conglomerate Affiliation: Evidence from Hedge Funds.” Journal of Financial Economics, 134 (2019), 355–380.CrossRefGoogle Scholar
Gallagher, E.; Schmidt, L. D. W.; Timmermann, A. G.; and Wermers, R.. “Investor Information Acquisition and Money Market Fund Risk Rebalancing during the 2011–2012 Eurozone Crisis.” Review of Financial Studies, 33 (2020), 1445–1483.CrossRefGoogle Scholar
Gatev, E., and Strahan, P. E.. “Banks’ Advantage in Hedging Liquidity Risk: Theory and Evidence from the Commercial Paper Market.” Journal of Finance, 61 (2006), 867–892.CrossRefGoogle Scholar
Gennaioli, N.; Shleifer, A.; and Vishny, R.. “Neglected Risks, Financial Innovation, and Financial Fragility.” Journal of Financial Economics, 104 (2012), 452–468.CrossRefGoogle Scholar
Gorton, G.; and Pennacchi, G.. “Financial Intermediaries and Liquidity Creation.” Journal of Finance, 45 (1990), 49–71.CrossRefGoogle Scholar
Hanson, S. G.; Scharfstein, D. S.; and Sunderam, A.. “An Evaluation of Money Market Fund Reform Proposals.” IMF Economic Review, 63 (2015), 984–1023.CrossRefGoogle Scholar
Hanson, S. G.; Shleifer, A.; Stein, J. C.; and Vishny, R. W.. “Banks as Patient Fixed-Income Investors.” Journal of Financial Economics, 117 (2015), 449–469.CrossRefGoogle Scholar
Holmström, B., and Tirole, J.. Inside and Outside Liquidity. Cambridge, MA: MIT Press (2011).CrossRefGoogle Scholar
Investment Company Institute. “Investment Company Fact Book: A Review of Trends and Activities in the Investment Company Industry.” Industry Report, available at https://www.ici.org/pdf/2020_factbook.pdf (2020).Google Scholar
Kacperczyk, M., and Schnabl, P.. “How Safe Are Money Market Funds?” Quarterly Journal of Economics, 128 (2013), 1073–1122.CrossRefGoogle Scholar
Kashyap, A. K.; Rajan, R. G.; and Stein, J. C.. “Banks as Liquidity Providers: An Explanation for the Co-Existence of Lending and Deposit-Taking.” Journal of Finance, 57 (2002), 33–74.CrossRefGoogle Scholar
Khwaja, A. I., and Mian, A.. “Tracing the Impact of Bank Liquidity Shocks: Evidence from an Emerging Market.” American Economic Review, 98 (2008), 1413–1442.CrossRefGoogle Scholar
Krishnamurthy, A., and Vissing-Jørgensen, A.. “The Impact of Treasury Supply on Financial Sector Lending and Stability.” Journal of Financial Economics, 118 (2015), 571–600.CrossRefGoogle Scholar
La Spada, G. “Competition, Reach for Yield, and Money Market Funds.” Journal of Financial Economics, 129 (2018), 87–110.CrossRefGoogle Scholar
Nagel, S. “The Liquidity Premium of Near-Money Assets.” Quarterly Journal of Economics, 131 (2016), 1927–1971.CrossRefGoogle Scholar
Schmidt, L.; Timmermann, A.; and Wermers, R.. “Runs on Money Market Mutual Funds.” American Economic Review, 106 (2016), 2625–2657.CrossRefGoogle Scholar
Schwert, M. “Municipal Bond Liquidity and Default Risk.” Journal of Finance, 72 (2017), 1683–1722.CrossRefGoogle Scholar
Sirri, E. R., and Tufano, P.. “Costly Search and Mutual Fund Flows.” Journal of Finance, 53 (1998), 1589–1622.CrossRefGoogle Scholar
Sundaresan, S., and Xiao, K.. “Unintended Consequences of Post-Crisis Liquidity Regulation.” Working Paper, Columbia University (2018).CrossRefGoogle Scholar
Treasury Strategies. “Operational Implications of a Floating NAV across Money Market Fund Industry Key Stakeholders.” Policy Report of the U.S. Chamber of Commerce Center for Capital Markets Competitiveness, available at https://www.treasurystrategies.com/wp-content/uploads/TSI_USCC_VNAV.pdf (2013).Google Scholar