Assessing Credit Risk in Money Market Fund Portfolios

Sean Collins and Emily Gallagher

MPRA Paper from University Library of Munich, Germany

Abstract: This paper measures credit risk in prime money market funds (MMFs), studies how such credit risk evolved in 2011-2012, and tests the efficacy of the Securities and Exchange Commission’s (SEC) January 2010 reforms. To accomplish this, we estimate the credit default swap premium (CDS) needed to insure each fund’s portfolio against credit losses. We also calculate by Monte Carlo the cost of insuring a fund against losses amounting to over 50 basis points. We find that credit risk of prime MMFs rose from June to December 2011 before receding in 2012. Contrary to common perceptions, this did not primarily reflect funds’ credit exposure to eurozone banks. Instead, credit risk in prime MMFs rose because of the deteriorating credit outlook of banks in the Asia-Pacific region. Finally, we find evidence that the SEC’s 2010 liquidity and weighted average life (WAL) requirements reduced the credit risk of prime MMFs.

Keywords: Money market funds; credit risk; SEC; eurozone; CDS (search for similar items in EconPapers)
JEL-codes: G01 G15 G18 G22 G23 G28 (search for similar items in EconPapers)
Date: 2014-05-27
New Economics Papers: this item is included in nep-ban, nep-fmk, nep-rmg and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:56256

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