Money Market Mutual Funds Research Articles

The Impact of Risk and Return Perceptions on the Portfolio Reallocation Decisions of Mutual Fund Investors

To explore how portfolio allocations among equities, fixed income securities, and cash are impacted by investors’ risk and return expectations, this paper explores portfolio reallocations among equity, bond, and money market mutual funds. As predicted by the literature on optimal portfolio allocations for hypothetical investors, mutual fund investors rebalance in response to variables which have been found to have possible predictive content for future stock market returns and/or volatility, especially the slope of the term structure. We also find that investors’ portfolio reallocation decisions are strongly correlated with recent stock and bond market returns and stock and bond market uncertainty as measured by implied volatilities. Stock market returns primarily stimulate exchanges between equity and money market funds with little impact on bond funds. Similarly bond market returns primarily stimulate exchanges between bond and money market funds with little impact on stock funds. Mutual fund investors apparently pay more attention to bond market returns than to current yields-to-maturity. Increases in stock market uncertainty lead to a movement of funds out of equity funds while increases in bond market uncertainty lead to exchanges out of bond funds. We find no evidence that mutual fund investors follow the advice of financial advisors to rebalance following large stock or bond price movements to restore their portfolio proportions to pre-existing target levels. Instead they do the opposite moving more funds into equity funds when the stock market rises and into bond funds when the bond market rises.

How Does Monetary Transmission Mechanism Impact Output, Inflation and Money Market Funds in Argentine?

The paper is aimed at quantifying empirically the monetary transmission mechanism for Argentine, and at analyzing the responses of output, inflation, and money market mutual funds (MMMF) to a positive monetary shock. The idea of incorporating MMMF into the system is to understand how economic agents (retailers, corporations and institutions) react to different economic scenarios, and to test how they would respond to a number of macroeconomic shocks. Application of a Vector Auto regression (VAR) approach and utilization of accounting innovations (Impulse Response Functions and Variance Decompositions) and Granger causality test will help us determine the dynamic path for each variable.

Government Support of the Short-Term Markets

The ongoing credit crunch has paralyzed the international debt capital markets for quite some time, but its tremors could be felt in the short-term debt capital markets as early as August 2007. Recognizing that the health and vitality of the short-term markets is a fundamental cornerstone of liquidity in the debt capital markets generally, both the U.S. and U.K. governments have taken unprecedented steps to help bolster the commercial paper markets. The U.S. government has, through the Federal Reserve and the Department of the Treasury, implemented four short-term market support programs, namely, the ABCP Money Market Mutual Fund Liquidity Facility, the Treasury Temporary Guarantee Program, the Commercial Paper Funding Facility, and the Money Market Investor Funding Facility. The U.K. government promptly followed suit, establishing the Commercial Paper Facility and the Secured Commercial Paper Facility, both administered by the Bank of England. While these efforts have had limited success in “reviving” the shortterm markets, some of them have certainly been helpful in preventing a meltdown of the debt capital markets, which has continued to be a very real and grave risk. <b>TOPICS:</b>Legal and regulatory issues for structured finance, legal/regulatory/public policy

Regulating the Shadow Banking System

The “shadow” banking system played a major role in the financial crisis, but was not a central focus of the recent Dodd-Frank Law and thus remains largely unregulated. This paper proposes principles for the regulation of shadow banking and describes a specific proposal to implement those principles. We first document the rise of shadow banking over the last three decades, helped by regulatory and legal changes that gave advantages to three main institutions of shadow banking: money-market mutual funds (MMMFs) to capture retail deposits from traditional banks, securitization to move assets of traditional banks off their balance sheets, and repurchase agreements (“repo”) that facilitated the use of securitized bonds in financial transactions as a form of money. A central idea of this paper is that the evolution of a bankruptcy “safe harbor” for repo has been a crucial feature in the growth and efficiency of shadow banking, and so regulators can use access to this safe harbor as the lever to enforce new rules. As for the rules themselves, history has demonstrated two successful methods for the regulation of privately created money: strict guidelines on collateral (used to stabilize national bank notes in the 19th century), and government-guaranteed insurance (used to stabilize demand deposits in the 20th century). We propose the use of insurance for MMMFs combined with strict guidelines on collateral for both securitization and repo as the best approach for shadow banking, with regulatory control established by chartering new forms of narrow banks for MMMFs and securitization and using the bankruptcy safe harbor to incent compliance on repo.

The Commercial Paper Funding Facility

The commercial paper market experienced considerable strain in the weeks following the bankruptcy of Lehman Brothers on September 15, 2008, leading to liquidity pressures as investors such as money market mutual funds became increasingly reluctant to purchase commercial paper. As a result, the percentage of outstanding commercial paper that had to be refinanced each day rose rapidly during the Fall of 2008, interest rates on longer-term commercial paper increased significantly, and the volume of outstanding commercial paper declined sharply. A large share of outstanding commercial paper is issued or sponsored by financial intermediaries, and their difficulties placing commercial paper reduced their ability to meet the credit needs of businesses and households. The Commercial Paper Funding Facility (CPFF) provides a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle (SPV) that purchases eligible three-month unsecured and asset-backed commercial paper from eligible issuers using financing provided by the Federal Reserve Bank of New York. The SPV holds the commercial paper until maturity and uses the proceeds from maturing commercial paper and other assets of the SPV to repay its loan from the New York Fed. The paper discusses design issues, as well as measures of evaluation of the facility.

The Commercial Paper Market, the Fed, and the 2007-2009 Financial Crisis

Since its inception in the early nineteenth century, the U.S. commercial paper market has grown to become a key source of short-term funding for major businesses, with issuance averaging over $100 billion per day. In the fall of 2008, the commercial paper market achieved national promin ence when increasing market stress caused some to fear that, given its size and importance, the market’s failure would sharply worsen the recession. The Department of the Treasury and Federal Reserve enacted programs targeted at providing credit and liquidity to restore investor confidence. The authors review the history of the commercial paper market, describe its structure and key relat ionships to money market mutual funds, and present a detailed discussion of the crisis in the market, including the resulting Federal Reserve programs. (JEL G01, G24, E52)

Human Capital as an Asset Mix and Optimal Life-Cycle Portfolio: An Analytical Solution

This study examines life-cycle optimal consumption and asset allocation in the presence of human capital. Labor income seems like a money market mutual fund whose balance in one or two years is predictable but a wide dispersion results after many years, reflecting fluctuations in economic conditions. We use the martingale method to derive an analytical solution, finding that Merton's well-known constant-mix strategy is still true after incorporating human capital from the perspective of total wealth management. Moreover, the proportion in risky assets implicit in the agent's human capital is the main factor determining the optimal investment strategy. The numerical examples suggest that young investors should short stocks because their human capital has large market exposure. As they age, however, their human capital becomes bond-like, and thus they have to hold stocks to achieve optimal overall risk exposure.

Why do banks promise to pay par on demand?

We survey the theories on why banks promise to pay par on demand and examine evidence on the conditions under which banks have promised to pay the par value of deposits and banknotes on demand when holding only fractional reserves. The theoretical literature is divided into four strands: liquidity provision; asymmetric information; legal restrictions; and a medium of exchange. We assume that it is not zero cost to make a promise to redeem a liability at par value on demand. If so, then the conditions in the theories that result in par redemption are possible explanations why banks promise to pay par on demand. If the explanation based on customers’ demand for liquidity is correct, payment of deposits at par will be promised when banks hold assets that are illiquid in the short run. If the asymmetric-information explanation based on the difficulty of valuing assets is correct, the marketability of banks’ assets determines whether banks promise to pay par. If the legal restrictions explanation of par redemption is correct, banks will not promise to pay par if they are not required to do so. If the transaction explanation is correct, banks will promise to pay par if the deposits are used in transactions. We examine the history of banking in several countries in different eras: fourth century Athens, medieval Italy, Tokugawa Japan, and free banking and money market mutual funds in the United States. Each of the theories explains some of the observed banking arrangements and none explains all of them.

T Rowe Price Group Inc.

AbstractWealth Management (MIC: 8.8 SIC: 6282 NAIC: 523930)T. Rowe Price Group is a financial services holding company that operates its investment advisory business through its subsidiary companies, primarily T. Rowe Price Associates, T. Rowe Price International, and T. Rowe Price Global Investment Services. Co. manages U.S. domestic and international stock, bond, and money market mutual funds and other investment portfolios. As of Dec 31 2006, Co. had total assets under management of $334.70 billion. Co.'s assets under management are sourced from: third‐party financial intermediaries; individual U.S. investors on a direct basis; U.S. defined contribution retirement plans; and institutional investors.

Repurchase Agreements in Financial Markets: Financial and Legal Prospective

'lending' and 'borrowing' the financial market can be classified into capital market and the money market. The money market is an investment area where investors can buy short-term debt securities.1 Money market securi ties are highly marketable, easily convertible into cash and have the short est maturities than any debt securities. Money market investments are the short-term debts that mature from anywhere in one day to one year.2 The major participants in the money market are commercial banks, gov ernments, corporations, government-sponsored enterprises, money mar ket mutual funds, futures market exchanges, brokers and dealers, and the BRILL

T Rowe Price Group Inc.

AbstractWealth Management (MIC: 8.8 SIC: 6282 NAIC: 523930)T. Rowe Price Group is a financial services holding company that operates its investment advisory business through its subsidiary companies, primarily T. Rowe Price Associates, T. Rowe Price International, and T. Rowe Price Global Investment Services. Co. manages U.S. domestic and international stock, bond, and money market mutual funds and other investment portfolios. As of Dec 31 2006, Co. had total assets under management of $334.70 billion. Co.'s assets under management are sourced from: third‐party financial intermediaries; individual U.S. investors on a direct basis; U.S. defined contribution retirement plans; and institutional investors.

T Rowe Price Group Inc.

AbstractWealth Management (MIC: 8.8 SIC: 6282 NAIC: 523930)T. Rowe Price Group is a financial services holding company that operates investment advisory business through its subsidiary companies, T. Rowe Price Associates, T. Rowe Price International, and T. Rowe Price Global Investment Services. Additionally, Co. manages U.S. domestic and international stock, bond, and money market mutual funds and other investment portfolios. Co. also introduces new funds and other investment portfolios to complement and expand its investment offerings, respond to competitive developments in the financial marketplace, and meet the changing needs of its investment advisory clients. As of Dec 31 2006, Co.'s total assets under management were $334.70 billion.

Monetary policy and monetary asset substitution

This paper shows that changing the target Federal Funds rate induces changes in relative user costs of monetary assets. Estimated Morishima elasticities of substitution from the Fourier Flexible form reveal greater substitution from transactions assets and savings deposits into small time deposits than into retail money market mutual funds.

Portfolio maturity choice of Australian cash management trusts

Money Market Mutual Funds, known in Australia as Cash Management Trusts (CMTs), provide potential benefits for retail investors from pooling of funds and superior portfolio (maturity) management skills. The average maturity of CMT assets exhibits significant variation both cross sectionally and over time, but there is significant correlation between the asset maturities of different CMTs. These variations could reflect decisions about optimal asset maturity by CMT management, given their expectations of future interest rate movements. This paper examines (and rejects) the hypothesis that CMT management has superior interest rate forecasting ability by testing whether asset maturity of CMTs provides any information about future interest rate movements. The correlation between CMT maturity decisions appears to reflect the tendency of some CMTs to adjust maturity in response to current changes in market interest rates.

Why Do Banks Promise to Pay Par on Demand?

We survey the theories of why banks promise to pay par on demand and examine evidence about the conditions under which banks have promised to pay the par value of deposits and banknotes on demand when holding only fractional reserves. The theoretical literature can be broadly divided into four strands: liquidity provision, asymmetric information, legal restrictions, and a medium of exchange. We assume that it is not zero cost to make a promise to redeem a liability at par value on demand. If so, then the conditions in the theories that result in par redemption are possible explanations of why banks promise to pay par on demand. If the explanation based on customers' demand for liquidity is correct, payment of deposits at par will be promised when banks hold assets that are illiquid in the short run. If the asymmetric-information explanation based on the difficulty of valuing assets is correct, the marketability of banks' assets determines whether banks promise to pay par. If the legal restrictions explanation of par redemption is correct, banks will not promise to pay par if they are not required to do so. If the transaction explanation is correct, banks will promise to pay par value only if the deposits are used in transactions. After the survey of the theoretical literature, we examine the history of banking in several countries in different eras: fourth-century Athens, medieval Italy, Japan, and free banking and money market mutual funds in the United States. We find that all of the theories can explain some of the observed banking arrangements, and none explain all of them.

Deposit insurance, bank regulation, and financial system risks

Empirical evidence is presented to show that in modern times banks can hedge liquidity shocks but could not do so prior to FDIC insurance. However, the government's limitations in properly pricing FDIC insurance are leading to many current examples of moral hazard. A model is presented to show that if insurance premiums are set to be “actuarially fair,” incentives for banks to take excessive systematic risks remain. Motivated by empirical evidence that money market mutual funds also can hedge liquidity shocks, I consider an alternative government insurance system that mitigates distortions to risk-taking yet preserves liquidity hedging and information synergies.

The Demand for Money Market Mutual Funds

This paper presents a model on the demand for money market funds (MMFs). These funds are a very close substitute for M1 deposits, except that MMFs do not satisfy immediate transaction requirements. The demand for MMFs strengthens when the intended volume of transactions is low. A high interest rate level makes it expensive to hold M1 deposits. High interest rate volatility, paradoxically, increases the risk of holding M1 deposits stronger than the risk of holding MMFs. The results are largely corroborated by Finnish data.

Cross-Sectional Differences between Money Market Mutual Funds and Their Role in the Mutual Fund Families

Cross-Sectional Differences between Money Market Mutual Funds and Their Role in the Mutual Fund Families

The Demand for Money Market Mutual Funds

This paper presents a model on the demand for money market funds (MMFs).These funds are a very close substitute for M1 deposits, except that MMFs do not satisfy immediate transaction requirements. The demand for MMFs strengthens when the intended volume of transactions is low.A high interest rate level makes it expensive to hold M1 deposits.High interest rate volatility, paradoxically, increases the risk of holding M1 deposits stronger than the risk of holding MMFs.The results are largely corroborated by Finnish data. Key words: money market mutual funds, money demand JEL classification numbers: G23, G29, E41

Market Efficiency and Money Market Fund Portfolio Managers: Beliefs Versus Reality

This paper develops two models of the money market mutual fund maturity decision. The first assumes that markets are efficient but that transactions are costly. The second model relies on a survey of fund managers to select variables that might permit exploiting perceived profit opportunities. Empirical tests provide strong support for the former model, but none for the latter. This can be interpreted as meaning that although managers may believe that financial markets are inefficient, margins are too small and competition too fierce for them to act aggressively on those beliefs. Any actions they do take to exploit alleged inefficiencies are not detectable in the data. In addition, the study finds that managers in the aggregate have no special ability to adjust their funds' maturity to capitalize on interest-rate changes.