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Money Fund Runs

Money Fund Runs

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Money Fund Runs

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  1. Money Fund Runs Russ Wermers, University of Maryland Presentation at Bocconi University Milan Friday, November 7, 2014

  2. Relevance of Money Market Mutual FundsAs “Shadow Banks” • At the end of 2009: • 705 money funds • 303 “prime funds” • 1,849 shareclasses total; 794 shareclasses in “prime funds” • $3.3 trillion in assets under management • $1.1 trillion government funds • $1.8 trillion non-government funds • $0.4 trillion tax-exempt funds • About 35% is held by retail investors (over $1 trillion) • By comparison, M1=$1.8 trillion Money Fund Runs

  3. Portfolio Holdings of Prime Money Funds (%) Money Fund Runs

  4. The Public Perception of Money Funds • Small investors use as a substitute for a checking account to obtain higher yield • Most investors believe that money funds have at least some implicit backing by the fund complex Money Fund Runs

  5. The Events of September 2008 • 9/15/2008: Lehman Brothers declared bankruptcy • 9/16/2008: Reserve Primary Fund held 1% Lehman securities • Allegations by Ameriprise that institutional investors were “tipped off” • Reserve allowed redemptions at $1 per share prior to 3 pm; closing 4 pm NAV = $0.97 per share (now Lehman securities have 3% impact) • Fund went from $62.6 billion on 9/12 to $23 billion on 9/16 Money Fund Runs

  6. The Events of September 2008 • 9/19/2008: Treasury announces that it will guarantee certain money fund assets • Sets up voluntary insurance program for money funds with a NAV of at least $0.995 as of 9/19/2008 • Insurance is triggered when NAV falls below $0.995 Money Fund Runs

  7. Money Fund Runs

  8. Money Fund Runs

  9. Money Fund Runs

  10. New SEC Rules on Money Funds(Phased in during 2010) • Improved Liquidity: • 10% of portfolio must be easily convertible to cash within one day; 30% within one week • Higher Credit Quality: • Maximum of 3% of portfolio in “Second Tier” securities (down from 5% previously) • Max of 0.5% in single issuer • Less than 45 days maturity • Weighted-avg maturity less than 60 days (down from 90 days) Money Fund Runs

  11. New SEC Rules on Money Funds(Phased in during 2010) • “Know your investor” • Requires funds to forecast the risk of large redemptions based on clientele • Periodic “stress tests” required (analysis of risk) • Funds required to analyze credit risk of each security purchased beyond simple outside ratings • Collateral for repos must be cash or govt securities • Funds must disclose portfolios monthly on website Money Fund Runs

  12. Past Research on Bank Runs • Diamond and Dybvig (1983) • Self-fulfilling bank run is equilibrium • Postlewaite and Vives (1987) • Extend DD to show that a run can occur in a given bank even if there is no information on the probability of that bank’s failure • Goldstein and Pauzner (2005) and Jacklin and Bhattacharya (1988) • Model information-based bank runs Money Fund Runs

  13. Contributions of Our Study • Examine the money fund “panic” of September 2008 • Which funds and which investors had correlated outflows? • Deep pocket vs. shallow pocket complexes • Liquid vs. illiquid funds • Institutional vs. retail investors • Was this a pure DD panic, or were some of the redemptions based on information? Money Fund Runs

  14. Money Fund Data • Extensive panel dataset of the vast majority of money market mutual funds • December 31, 1997-June 30, 2009 data from iMoneyNet • Daily total net assets (TNA) of individual shareclasses • Money funds that predominantly cater to institutional investors • Money funds that predominantly cater to retail investors • Some holdings statistics: • % Maturing within 7 days • % Treasurys • % Commercial paper • % “First Tier,” “Second Tier” holdings Money Fund Runs

  15. Category Level: VAR Analysis (Pre-Crisis Period, prior to 8/1/2008) Money Fund Runs

  16. Category Level: VAR Analysis (Crisis Period, September 2008) Money Fund Runs

  17. Do Runs Occur at Complex Level?Analysis • Legal pooling is at fund level, not complex level • However, implicit guarantee could create externalities between funds at complex level • Also, similar portfolio holdings between funds within a complex may add further externalities • Outflow-induced price pressure • At complex level, we can uniquely analyze exchanges from Govt to Prime Funds (and the reverse) Money Fund Runs

  18. Measure of Exchanges • True exchanges not available • A conservative estimate of exchanges: • If prime and govt aggregate net flows are same direction (both positive or both negative), assume no exchanges occur • If they run counterflow (one positive, one negative), assume the smallest (absolute value) is the correct exchange amount Money Fund Runs

  19. Complex Level: Exchanges(Panel OLS) Money Fund Runs

  20. Complex Level: Exchanges(Panel OLS) Money Fund Runs

  21. Complex Level: Exchanges(Panel OLS) Money Fund Runs

  22. Complex Level: Exchanges(Panel OLS) Money Fund Runs

  23. Complex Level: Exchanges(Panel OLS) Money Fund Runs

  24. Complex Level: Exchanges(Panel OLS) Money Fund Runs

  25. Fund Level(Panel OLS) Money Fund Runs

  26. Fund Level(Panel OLS) Money Fund Runs

  27. Summary • September 2008 period unique for study of “bank runs” • Prime funds exhibit many characteristics of runs • Most severe correlations in flows for funds catering to institutions • Some correlation in flows for retail funds • Funds with more liquid holdings exhibit less correlation • An information effect rather than pure panic? • Biggest influence on investor flow appears to be other same-complex funds in the same category (as opposed to other outside-complex funds in the same category) • An information effect rather than pure panic? Money Fund Runs