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Investor monitoring, money-likeness and stability of money market funds

Author

Listed:
  • Järvenpää, Maija
  • Paavola, Aleksi
Abstract
An asset is money-like if investors have no incentives to acquire costly private information on the underlying collateral. However, privately provided money-like assets-like prime money market fund (MMF) shares-are prone to runs if investors suddenly start to question the value of the collateral. Therefore, for risky assets, lack of money-likeness is a necessary condition for lack of run incentives. But is it a sufficient one? This paper studies the effect of the U.S. money market fund reform of 2014-2016 on investor monitoring, money-likeness and stability of institutional prime MMFs. Using the number of distinct IP addresses accessing MMFs' regulatory reports as a proxy for investor monitoring, we find that the reform increased monitoring and thus decreased money-likeness of institutional prime funds. However, we also show that after the reform, institutional prime funds that are more likely to impose the newly introduced redemption restrictions are more monitored, suggesting that investors may monitor in order to avoid being hit by the restrictions. Overall, our results indicate that increased monitoring, or decreased money-likeness, has not made institutional prime MMFs run-free, and it may have actually created a new source of fragility for MMFs.

Suggested Citation

  • Järvenpää, Maija & Paavola, Aleksi, 2021. "Investor monitoring, money-likeness and stability of money market funds," Bank of Finland Research Discussion Papers 2/2021, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2021_002
    as

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    File URL: https://www.econstor.eu/bitstream/10419/240343/1/BoF-DP-2102.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Money market funds; money markets; money market fund reform; money-likeness; information sensitivity; monitoring;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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