Competition, reach for yield, and money market funds

Gabriele La Spada

Journal of Financial Economics, 2018, vol. 129, issue 1, 87-110

Abstract: Do asset managers reach for yield because of competitive pressures in a low rate environment? I propose a tournament model of money market funds (MMFs) to study this question. When funds care about relative performance, an increase in the risk premium leads funds with lower default costs to increase risk taking, while funds with higher default costs decrease risk taking. Without changes in the premium, lower risk-free rates reduce the risk taking of all funds. I show that these predictions are consistent with MMF risk taking during the 2002–2008 period and that rank-based performance is a key determinant of money flows to MMFs.

Keywords: Reach for yield; Money market funds; Flow-performance relation; Tournament; Monetary policy (search for similar items in EconPapers)
JEL-codes: G11 G23 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304405X18301004
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Competition, reach for yield, and money market funds (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:129:y:2018:i:1:p:87-110

DOI: 10.1016/j.jfineco.2018.04.006

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().