slides

Marcin Kacperczyk & Philipp Schnabl
How Safe are Money Market Funds?
The Quarterly Journal of Economics (2013)
Maximilian Rohrer
September 29, 2014
Maximilian Rohrer
KS 2013 QJE
September 29, 2014
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Relation to Seminar
Marco Di Maggio & Marcin Kacperczyk [2014]: The Unintended
Consequence of the Zero Lower Bound Policy
I
Impact of monetary policy (zero-lower-bound) during the financial crisis
on risk taking incentives for money market funds
Marcin Kacperczyk & Philipp Schnabl [QJE, 2013]: How Safe are
Money Market Funds?
I
Impact of financial crisis on risk taking behaviour for money market
funds
Maximilian Rohrer
KS 2013 QJE
September 29, 2014
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Motivation: Reserve Prime vs. Fidelity Institutional
Maximilian Rohrer
KS 2013 QJE
September 29, 2014
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Motivation: Reserve Prime vs. Fidelity Institutional
Maximilian Rohrer
KS 2013 QJE
September 29, 2014
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Summary
During the financial crisis, Money Market (MM) funds...
1
had expanding risk taking opportunities,
2
had risk taking incentives,
3
incentives are a function of their overall business,
4
experienced runs as consequence of risk taking.
Maximilian Rohrer
KS 2013 QJE
September 29, 2014
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Primer on Money Market Funds
Alternative to bank deposits, regulation Q, and government insurance.
Rule 2a-7: regulation w.r.t. eligible short-term MM instruments of
high credit quality and diversification.
Constant net asset value of 1$.
Fund sponsor: stand-alone asset manager vs. financial conglomerate.
Lehman’s default (15 Sept. 2008): triggered run, especially on MM
funds holding Lehman’s commercial papers.
U.S. government (19 Sept. 2008): unlimited insurance of MM fund
deposits ($3 trillion).
Are MM funds low risk investment?
Maximilian Rohrer
KS 2013 QJE
September 29, 2014
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Data
Universe of taxable institutional prime money funds,
485 funds,
$1.67 trillion asset holdings,
32% commercial papers, 19.8% floating-rate notes, 13.5% repo,
13.4% asset-backed commercial papers, 12.2% bank obligations, 6%
US treasuries, and others.
57% institutional investors, 43% retail,
Spread: gross yield minus T-bill.
Maximilian Rohrer
KS 2013 QJE
September 29, 2014
7 / 16
Expanding Risk Taking Opportunities
Maximilian Rohrer
KS 2013 QJE
September 29, 2014
8 / 16
Risk Taking Incentives: Flow Performance Relationship
Incentives to take risk depend on the pay-off function: fixed
percentage fee.
Increase risk ⇒ increase yields ⇒ increase fund inflow ⇒ increase
fund sponsor’s income,
FundFlowt+1 = α + βSpreadt + γXt + ε
Implicit assumption: investors do not adjust for risk.
Why no relation in the pre-period?
Maximilian Rohrer
KS 2013 QJE
September 29, 2014
9 / 16
Risk taking incentives: flow performance relationship
Maximilian Rohrer
KS 2013 QJE
September 29, 2014
10 / 16
Cross-Section of Risk Taking Incentives
Risk taking behaviour differs in the cross-section of funds,
Fund sponsor’s concerns over non-MM fund business changes
incentives,
Spill-over effects: withdrawal from other funds of the sponsor, if MM
fails.
Conditional Mean:
Riskt+1 = α + βFundBusiness2006 + ε
FundBusiness =
Maximilian Rohrer
AssetsUnderMgmt(excl.MM)
AssetsUnderMgmt
KS 2013 QJE
September 29, 2014
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Cross-Section of Risk Taking Incentives
Maximilian Rohrer
KS 2013 QJE
September 29, 2014
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Post-Lehman
Cross-sectional variation around Lehman’s default,
Redemption: change in size of fund,
Support: no-action letters filed by SEC. Financial support within a
fund.
Exit: fund exiting the market .
Name − Change: Columbia Cash Reserves by Bank of America
became Bank of America Cash Reserves.
Maximilian Rohrer
KS 2013 QJE
September 29, 2014
13 / 16
Post-Lehman
Maximilian Rohrer
KS 2013 QJE
September 29, 2014
14 / 16
Critic
How to interpret the appearing spread in instruments?
Simultaneity: flow performance relation just after 2007.
No risk adjustment: ”retail investors are much less sensitive to yield
differentials than institutional investors”
Main variable Fund Business has a median of 81.6%.
Confounding effects within the financial crisis.
Maximilian Rohrer
KS 2013 QJE
September 29, 2014
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Summary
MM funds are risky.
Strong risk taking incentives,
...that differ in the cross-section.
Maximilian Rohrer
KS 2013 QJE
September 29, 2014
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