Contagious Runs in Money Market Funds and the Impact of a Government Guarantee

Abstract

Despite a vast theoretical literature on contagious behavior of investors, little is known about its empirical evidence in a real financial crisis setting. This paper examines evidence for contagious runs in money market funds during the 2008 financial crisis, drawing on a rich data set tracking U.S. money market funds’ daily flows and their enrollment statuses in the Treasury Department’s Temporary Guarantee Program (TGP). Evaluating the positive externality effect from a peer fund’s enrollment in the TGP on non-enrolled funds, we show that panic-driven runs were contagious across funds. We find that funds’ stability due to their enrollment in the guarantee program spilled over and enhanced daily flows to a non-enrolled fund by $1.8 million (compared to already-enrolled funds). Moreover, we find that retail investors were less likely than institutional investors to return to prime money market funds even after enrollment in the guarantee program, implying that the latter benefited more from the government backstop. Results are germane to policies seeking to rebuild investor confidence in times of financial crisis and reduce the chance of future contagion in this industry.