Competition, reach for yield, and money market funds

Gabriele La Spada

No 753, Staff Reports from Federal Reserve Bank of New York

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 issue. 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 2002-08 period and that rank-based performance is indeed a key determinant of money flows to MMFs..

Keywords: money market funds; reach for yield (search for similar items in EconPapers)
JEL-codes: G00 G20 G23 (search for similar items in EconPapers)
Pages: 119 pages
Date: 2015-12-08
New Economics Papers: this item is included in nep-fmk and nep-mon
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Journal Article: Competition, reach for yield, and money market funds (2018)
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