Prime Money Research Articles

The role of money in everyday life decisions: Investigating the effect of priming money on decision-making aspects with uncertain consequences

Introduction: Decision-making is an area of ​​human life that the cognitive sciences have long dreamed of drawing a complete profile of it. Aim: Considering the importance of identifying the role of priming money in everyday decision-making and also the lack of focus on this area, this study was conducted to investigate the mentioned priming on aspects of risk assessments and optimal selections among given options. Method: The research method was quasi – experimental with comparison group. The statistical population was all students of Allameh Tabataba'i University in Tehran in 2020-2021. From students of Bachelor of Science and Master of Science, 30 students were purposefully selected, then randomly divided into experimental and comparison groups. Data were collected using IOWA Gambling Task (IGT) and Barrat Impulsivity Scale and then analyzed using multivariate analysis of covariance in SPSS-24 software. Results: Significant differences were observed in the selection of cards from the advantageous decks in experimental group (M:31.26; SD:12.34) compared to the comparison group (M:22.06; SD:12.14) in the IGT (P<0.05). Conclusion: According to the findings of this study, priming money in laboratory situations have the ability to influence the cognitive dimensions of everyday decision making and in particular, improving the selective function and the prediction of estimated value result in choosing more cards from the advantageous decks in the IGT.

Prime money market funds regulation, global liquidity, and the crude oil market

This paper explores how the 2016 US Prime Money Market Funds (PMMFs) regulation affected the crude oil market. This reform led to an increase in short-term dollar borrowing costs and the oil sector became particularly susceptible to disruptions in the global funding market due to a post-financial crisis debt expansion which far outpaced other commodity industries. Building on the global crude oil market SVAR model pioneered by Kilian and Murphy (2014), we find that tighter PMMFs funding conditions have a lagged negative effect on the real price of crude oil and a lagged positive effect on oil production. We show that these responses are driven primarily by a fall in certificates of deposits issued by global banks. Lastly, we evidence that the US nominal effective exchange rate acts as a transmission channel for the negative funding shock to the real price of oil.

Investor Base and Prime Money Market Fund Behavior

Prime money market funds (MMFs) represent a key vulnerability in the financial system. During the last 15 years, they have experienced two severe investor runs, in September 2008 and March 2020, both of which contributed to full-scale financial crises.

The money priming debate revisited: A review, meta‐analysis, and extension to organizations

SummaryThe effects of primed money have received widespread attention in social psychology but not in the organizational literature. This research examines whether priming money causes people to think and behave in ways consistent with how they would act if they received real money. Money priming research has not made many inferences to organizations, but the potential implications of the findings for the workplace are thought‐provoking. However, because some money priming studies failed to replicate and many findings are mixed, we review this literature and meta‐analyze the effects of primed money on two organization‐related outcomes. Meta‐analytic results (12 259 participants, 90 effects adjusted for dependence, and 34 studies) showed that primed money increased performance (d = .38), but it also boosted selfishness (d = .33). These effects were moderated by perceptual or behavioral outcome measures, where primed money increased behavioral selfishness (d = .72) over twice as much as it did behavioral performance (d = .33). These meta‐analytic results clarify extant literature, provide a new platform for future money priming research in organizations, and offer new alternatives for managers looking for viable options to improve employee functioning.

Shadow Insurance? Money Market Fund Investors and Bank Sponsorship

Abstract We argue that bank holding companies (BHCs) extend shadow insurance to the prime institutional money market funds (PI-MMFs) they sponsor and that PI-MMFs price this shadow insurance by charging investors significantly higher expense ratios and paying lower net yields. We provide evidence that after September 2008, expense ratios at BHC-sponsored PI-MMFs increased more than at non-BHC-sponsored PI-MMFs. Despite higher expense ratios, BHC-sponsored PI-MMFs did not experience larger redemptions than non-BHC-sponsored PI-MMFs. In addition, we show that expense ratios increased with BHCs’ financial strength and the likelihood of their support; however, this expense ratio differential disappeared after the 2016 MMF reform. (JEL G2, G21, G23, G28, H12, H81)

Investor Monitoring, Money-Likeness and Stability of Money Market Funds

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. In line with this view, we find that a high probability of redemption restrictions amplifies the run on institutional prime MMFs during the Covid-19 related market panic in March 2020. Overall, our results indicate that despite decreased money-likeness, the reform has not made institutional prime MMFs run-free, and it may have actually created a new source of fragility for MMFs.

The Money Market Mutual Fund Liquidity Facility

In this article, we discuss the run on prime money market funds (MMFs) that occurred in March 2020, at the onset of the COVID-19 pandemic, and describe the Money Market Mutual Fund Liquidity Facility (MMLF), which the Federal Reserve established in response to it. We show that the MMLF, like a similarly structured Federal Reserve facility established during the 2008 financial crisis, was an important tool in stemming investor outflows from MMFs and restoring calm in short-term funding markets. The usage of the facility was higher by funds that suffered larger outflows. After the facility’s introduction, outflows from prime MMFs decreased more for those funds that had a larger share of illiquid securities. Importantly, following the introduction of the MMLF, interest rates on MMLF-ineligible securities decreased at a slower rate than those on MMLF-eligible securities, even after controlling for credit risk.

COVID Response: The Money Market Mutual Fund Facility

In this article, we discuss the run on prime money market funds (MMFs) that occurred in March 2020, at the onset of the COVID-19 pandemic, and describe the Money Market Mutual Fund Liquidity Facility (MMLF), which the Federal Reserve established in response to it. We show that the MMLF, like a similarly structured Federal Reserve facility established during the 2008 financial crisis, was an important tool in stemming investor outflows from MMFs and restoring calm in short-term funding markets. The usage of the facility was higher by funds that suffered larger outflows. After the facility’s introduction, outflows from prime MMFs decreased more for those funds that had a larger share of illiquid securities. Importantly, following the introduction of the MMLF, interest rates on MMLF-ineligible securities decreased at a slower rate than those on MMLF-eligible securities, even after controlling for credit risk.

Prime Time to Re-examine Prime Money Market Funds: Floating NAVs and Liquidity Risk During Economic Crises

This paper offers a first look at a recent innovation, namely, mutual funds offering intraday share redemptions. This novel design feature emerged following the adoption of floating net asset values by prime institutional money market funds in October 2016. Consistent with a theoretical model, we find that funds offering multiple intraday NAVs and redemption windows maintain higher liquidity buffers but are exposed to significantly larger outflows during periods of stress, compared to funds offering end-of-day NAVs/redemptions. Our analysis covers (1) the COVID-19 shock of March 2020, and (2) the near-default of U.S. debt during the debt ceiling crisis of 2018.

Sophisticated and Unsophisticated Runs

This paper characterizes the run behavior of sophisticated (institutional) and unsophisticated (retail) investors by studying the runs on prime money market funds (MMFs) of March 2020, at the beginning of the COVID-19 pandemic. For both U.S. and European institutional prime MMFs, the runs were more severe in funds for which the imposition of redemption gates and fees was a material possibility because of their lower liquidity positions. In contrast, although U.S. retail prime MMFs are also required to adopt the same system of gates and fees, their outflows did not depend on fund liquidity; unsophisticated (retail) investors ran more often if their funds belonged to a family offering institutional prime MMFs and suffering larger institutional redemptions. Finally, across investor types, MMFs belonging to families with a larger offering of government MMFs experienced larger outflows; this result is consistent with lower switching costs in fund families that are more specialized in government funds.

Debt versus Equity in Liquidity Provision

We propose a unified framework to compare and quantify liquidity provision by debt-issuing banks and equity-issuing mutual funds. We show that both types of financial intermediaries provide liquidity by insuring against idiosyncratic liquidity risks. However, they are subject to distinct constraints depending on the contractual form of their liabilities. Banks issue demandable debt, which exposes them to the possibility of panic runs, whereas funds issue demandable equity, which leads to fundamentals-driven outflows. Based on our theoretical framework, we develop the first empirical measure of liquidity provision that can be generally applied across demandable-debt- and demandable-equity-issuing financial institutions: the Liquidity Provision Index (LPI). We find that a dollar invested in bond mutual funds provides 4.8 cents of liquidity, which is economically significant at one-quarter of the liquidity provided by uninsured bank deposits at the end of 2017. The gap between bank and fund liquidity provision has continuously narrowed over time, suggesting a migration of liquidity provision away from the deposit-taking banking sector to equity-funded non-banks. We find Quantitative Easing and post-crisis liquidity regulation to be contributing factors for this trend. Finally, we exploit the 2016 Money Market Reform, in which institutional prime Money Market Funds (MMF) switched from a fixed to a floating share value, to corroborate the effect of contractual forms on liquidity provision.

Scale Economies in the Money Market

Money-market issuers reward scale when they borrow from prime money funds. The scale they reward isn’t the scale of the transaction or of the fund, but rather the scale of the fund complex. For a one-month loan the magnitude is a basis point per fourfold increase in complex size. Larger complexes also enjoy an advantage when exiting holdings: they are both more likely to part with a holding and more likely to exchange it with the issuer for new paper with longer maturity. Our results demonstrate both economies of scale, which can concentrate the industry, and also the importance of relationships in money-market transactions.

Investor Information Acquisition and Money Market Fund Risk Rebalancing during the 2011–2012 Eurozone Crisis*

Abstract We study investor redemptions and portfolio rebalancing decisions of prime money market mutual funds (MMFs) during the Eurozone crisis. We find that sophisticated investors selectively acquire information about MMFs’ risk exposures to Europe, which leads managers to withdraw funding from information-sensitive European issuers. That is, MMF managers, particularly those serving the most sophisticated investors, selectively adjust their portfolio risk exposures to avoid information-sensitive European risks, while maintaining or increasing risk exposures to other regions. This mechanism helps to explain the occurrence of selective “dry-ups” in debt markets where delegation is common and returns to information production are usually low. (JEL G01, G21, G23) Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

The Effect of NAV Flotation on the Management of Prime Money Fund Portfolios

The October, 2016 money-fund reform obliged institutional prime funds to start floating their Net Asset Values (NAVs), whereas retail prime funds could continue with stable NAVs. We use this contrast to assess the effect of NAV flotation on fund management. We find that institutional funds reduced their interest-rate, liquidity and credit risk around the reform, contributing to lower yields and NAVs, and less volatile NAVs, but by all measures, their relative risk taking was approximately back to where it was well before the reform by the end of 2017. Prime funds adjusted to their shrinkage largely through transaction sizes, but also somewhat through the number of securities per issuer they invested in, and to a small extent through the number of issuers they invested in. Transaction-size shrinkage harms transaction quality, though the quality of a fund’s transactions relates more strongly to the size of its fund complex than to the size of the transactions themselves.

Explaining Systemic Risk in Money Market Funds

For the first time, this study evaluates the contributions to systemic risk in the context of U.S. institutional prime money market funds (MMFs) from different sources using partial least squares structural equation modeling (PLS-SEM). The primary motivation behind this study is to trace systemic risk to its underlying sources and measure which types of relationships provide significant explanation using PLS-SEM. I illustrate the application of PLS-SEM and interpretation of results in a step-by-step manner to empower those new to PLS-SEM, and undertake robustness testing. Findings indicate that through crisis years, macroprudential indicators contribute to potential systemic risk more than prudential indicators. This suggests that macroprudential indicators that can be traced to individual MMFs market positions are more important in understanding systemic risk during crises, and further underlines the interconnectedness of markets. PLS-SEM can be used to test the explanatory power of new indicators as they emerge in an exploratory environment.

Liability Structure and Risk-Taking: Evidence from the Money Market Fund Industry

We exploit a change in regulation of money market funds to investigate how the structure of liabilities impacts financial intermediaries' asset holdings. We show that following a change in regulation, which has made prime money market funds' liabilities less money-like, safer funds exited the industry. The remaining funds have increased the riskiness of their portfolios, possibly in response to an increase in the sensitivity of flows to performance. As a result, issuers with lower risk of default have less access to funding from US money market funds. To the best of our knowledge, our paper provides the first evidence in support of theories highlighting that the characteristics of financial intermediaries' assets and liabilities are jointly determined.

The Intersection of U.S. Money Market Mutual Fund Reforms, Bank Liquidity Requirements, and the Federal Home Loan Bank System

The most recent changes to money market fund regulations have had a strong impact on the money fund industry. In the months leading up to the compliance date of the core provisions of the amended regulations, assets in prime money market funds declined significantly, while those in government funds increased contemporaneously. This reallocation from prime to government funds has contributed to the latter’s increased demand for debt issued by the U.S. government and government-sponsored enterprises. The Federal Home Loan Bank (FHLBank) System played a key role in meeting this heightened demand for U.S. government-related assets with increased issuance of short-term debt. The FHLBank System uses the funding obtained from money market funds to provide general liquidity to its members, including the largest U.S. banks. Large U.S. banks’ increased borrowings from the FHLBank System are motivated, in large part, by other post-crisis regulations, specifically the liquidity coverage ratio (LCR). The intersection of money market mutual fund reforms and the LCR have contributed to the FHLBanks’ increased reliance on short-term funding to finance relatively longer-term assets, primarily collateralized loans to its largest members. This funding model could be vulnerable to “runs” and impact financial markets and financial institutions in ways that are difficult to predict. While a funding run seems unlikely, it is often the violation of commonly held conventions that tend to pose financial stability risks. Indeed, runs on leveraged financial intermediaries engaged in maturity transformation have produced systemic risks issues in the past and are worthy of investigation and continuous monitoring.

The Stability of Prime Money Market Mutual Funds: Sponsor Support from 2007 to 2011

It is commonly noted that in the history of the Money Market Mutual Fund (MMMF) industry only two MMMFs have “broken the buck,” or had the net asset value per share (NAV) at which they transact fall below $1. While this statement is true, it is useful to consider the role that non-contractual support has played in the maintenance of this strong track record. Such support, which has served to obscure the credit risk taken by these funds, has been a common occurrence over the history of MMMFs. This paper presents a detailed view of the non-contractual support provided to MMMFs by their sponsors1 during the recent financial crisis based on an in depth review of public MMMF annual SEC financial statement filings (form N-CSR) with fiscal year-end dates falling between 2007 and 2011. According to our conservative interpretation of this data, we find that at least 21 prime MMMFs would have broken the buck absent a single identified support instance during the most recent financial crisis.2 Further, we identify repeat instances of support (or significant outflows) for some MMMFs during this period such that a total of at least 31 prime MMMFs would have broken the buck when considering the entirety of support activity over the full period.

Strategic complementarities and money market fund liquidity management

Abstract I use a unique institutional feature of money market funds to identify whether funds hold additional liquidity to guard against and prevent potential investor runs. Specifically, some funds are used as a cash management vehicle for related entities, such as other funds in the fund family. These “internal” funds should experience less outflows during market stress, and should thus have less need to hold this additional liquidity. Indeed, these “internal” prime money market funds do hold lower liquidity than other prime funds. This effect is most pronounced at quarter ends, when there is an exogenous reduction in cash demand from non-US bank dealers.

The Intersection of U.S. Money Market Mutual Fund Reforms, Bank Liquidity Requirements, and the Federal Home Loan Bank System

The most recent changes to money market fund regulations have had a strong impact on the money fund industry. In the months leading up to the compliance date of the core provisions of the amended regulations, assets in prime money market funds declined significantly, while those in government funds increased contemporaneously. This reallocation from prime to government funds has contributed to the latter's increased demand for debt issued by the U.S. government and government-sponsored enterprises. The Federal Home Loan Bank (FHLBank) System played a key role in meeting this heightened demand for U.S. government-related assets with increased issuance of short-term debt. The FHLBank System uses the funding obtained from money market funds to provide general liquidity to its members, including the largest U.S. banks. Large U.S. banks' increased borrowings from the FHLBank System are motivated, in large part, by other post-crisis regulations, specifically the liquidity coverage ratio (LCR). The intersection of money market mutual fund reforms and the LCR have contributed to the FHLBanks' increased reliance on short-term funding to finance relatively longer-term assets, primarily collateralized loans to its largest members. This funding model could be vulnerable to \runs and impact financial markets and financial institutions in ways that are difficult to predict. While a funding run seems unlikely, it is often the violation of commonly held conventions that tend to pose financial stability risks. Indeed, runs on leveraged financial intermediaries engaged in maturity transformation have produced systemic risks issues in the past and are worthy of investigation and continuous monitoring.