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Once Burned, Twice Shy: Money Market Fund Responses to a Systemic Liquidity Shock

Published online by Cambridge University Press:  08 June 2015

Philip E. Strahan  and
Başak Tanyeri
Philip E. Strahan*
Affiliation:
[email protected], Carroll School of Management, Boston College, Chestnut Hill, MA 02467
Başak Tanyeri
Affiliation:
[email protected], Faculty of Business Administration, Bilkent University, Ankara 06800, Turkey.
*
*Corresponding author: [email protected]
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Abstract

After Lehman’s collapse in 2008, investors ran from risky money market funds. In 27 funds, outflows overwhelmed cash inflows, thus forcing asset sales. These funds sold their safest and most liquid holdings. Funds were thus left with riskier and longer maturity assets. Over the subsequent quarter, however, the hard-hit funds reduced risk more than other funds. In contrast, money funds hit by idiosyncratic liquidity shocks before Lehman did not alter portfolio risk. The result suggests that moral hazard concerns with the Treasury Guarantee of investor claims did not increase risk taking. Funds that benefited most from the government bailout reduced risk.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 1-2 , April 2015 , pp. 119 - 144
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

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