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Money Market Funds and the Pricing of Near-Money Assets

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  • Doerr, Sebastian
  • Eren, Egemen
  • Malamud, Semyon

Abstract

We introduce a new channel through which US money market funds (MMFs) affect the pricing of near-money assets and measured convenience yields. Our theoretical model reveals that MMFs' strategic interactions create frictions that are exacerbated by T-bill market illiquidity. Using instrumental variables, we show that MMFs have an economically significant price impact in the T-bill market. Consistent with strategic behavior, they internalize this price impact when setting repo rates and allocating portfolios. Our evidence suggests that these frictions drive a sizeable part of common measures of T-bill convenience yields. Our results have implications for monetary policy transmission, government debt issuance, and the regulation of MMFs. T-bills, repo, money market funds, near-money assets, liquidity, convenience yield

Suggested Citation

  • Doerr, Sebastian & Eren, Egemen & Malamud, Semyon, 2024. "Money Market Funds and the Pricing of Near-Money Assets," CEPR Discussion Papers 18813, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18813
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    Cited by:

    1. Fabienne Schneider, 2024. "On-the-run Premia, Settlement Fails, and Central Bank Access," Working Papers 24.05, Swiss National Bank, Study Center Gerzensee.
    2. Eisenschmidt, Jens & Ma, Yiming & Zhang, Anthony Lee, 2024. "Monetary policy transmission in segmented markets," Journal of Financial Economics, Elsevier, vol. 151(C).
    3. Iñaki Aldasoro & Sebastian Doerr, 2023. "Who borrows from money market funds?," BIS Quarterly Review, Bank for International Settlements, December.

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    More about this item

    Keywords

    T-bills; Repo market; Money market funds; near-money assets; Liquidity; Convenience yield;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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