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Fragility in money market funds: Sponsor support and regulation

Cecilia Parlatore

Journal of Financial Economics, 2016, vol. 121, issue 3, 595-623

Abstract: Money market funds (MMFs), which are crucial to short-term funding markets, rely on voluntary support of fund sponsors to maintain stable share values. I develop a general equilibrium model of MMFs to study how sponsor support affects the industry’s fragility and regulation. Adverse asset-quality shocks lead MMFs to liquidate assets. When liquidity in asset markets is limited, asset prices are lower if more funds liquidate. Lower asset prices, in turn, make sponsor support costlier and even more liquidations occur. This feedback leads to complementarities in sponsors’ support decisions. Based on the model’s insights, I derive implications for the regulation of MMFs.

Keywords: Fragility; Money market funds; Sponsor support; Regulation; Liquidity (search for similar items in EconPapers)
JEL-codes: G01 G23 G28 (search for similar items in EconPapers)
Date: 2016
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