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Sturm und Drang in money market funds: when money market funds cease to be narrow

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  • Jank, Stephan
  • Wedow, Michael

Abstract

This paper investigates the returns and flows of German money market funds before and during the liquidity crisis of 2007/2008. The main findings of this paper are: In liquid times money market funds enhanced their returns by investing in less liquid papers. By doing so they outperformed other funds as long as liquidity in the market was high. Investing in less liquid assets, however, widens the narrow structure of money market funds and makes them vulnerable to runs. During the shortening of liquidity caused by the subprime crisis illiquid funds experienced runs, while more liquid funds functioned as a safe haven.

Suggested Citation

  • Jank, Stephan & Wedow, Michael, 2008. "Sturm und Drang in money market funds: when money market funds cease to be narrow," Discussion Paper Series 2: Banking and Financial Studies 2008,20, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdp2:200820
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    References listed on IDEAS

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    Cited by:

    1. Timmermann, Allan & Wermers, Russ, 2014. "Runs on Money Market Funds," CEPR Discussion Papers 9906, C.E.P.R. Discussion Papers.
    2. Bua, Giovanna & Dunne, Peter G. & Sorbo, Jacopo, 2019. "Money Market Funds and Unconventional Monetary Policy," Research Technical Papers 7/RT/19, Central Bank of Ireland.
    3. Witmer, Jonathan, 2016. "Does the buck stop here? A comparison of withdrawals from money market mutual funds with floating and constant share prices," Journal of Banking & Finance, Elsevier, vol. 66(C), pages 126-142.
    4. Mark Egan & Ali Hortaçsu & Gregor Matvos, 2017. "Deposit Competition and Financial Fragility: Evidence from the US Banking Sector," American Economic Review, American Economic Association, vol. 107(1), pages 169-216, January.
    5. Fecht, Falko & Wedow, Michael, 2014. "The dark and the bright side of liquidity risks: Evidence from open-end real estate funds in Germany," Journal of Financial Intermediation, Elsevier, vol. 23(3), pages 376-399.
    6. Kim, Hugh Hoikwang, 2020. "Information spillover of bailouts," Journal of Financial Intermediation, Elsevier, vol. 43(C).
    7. Lawrence Schmidt & Allan Timmermann & Russ Wermers, 2016. "Runs on Money Market Mutual Funds," American Economic Review, American Economic Association, vol. 106(9), pages 2625-2657, September.
    8. Jank, Stephan, 2012. "Mutual fund flows, expected returns, and the real economy," Journal of Banking & Finance, Elsevier, vol. 36(11), pages 3060-3070.
    9. Thomas Johann & Stefan Scharnowski & Erik Theissen & Christian Westheide & Lukas Zimmermann, 2019. "Liquidity in the German Stock Market," Schmalenbach Business Review, Springer;Schmalenbach-Gesellschaft, vol. 71(4), pages 443-473, October.
    10. Bengtsson, Elias, 2013. "Shadow banking and financial stability: European money market funds in the global financial crisis," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 579-594.
    11. Capotă, Laura-Dona & Grill, Michael & Molestina Vivar, Luis & Schmitz, Niklas & Weistroffer, Christian, 2022. "Is the EU money market fund regulation fit for purpose? Lessons from the COVID-19 turmoil," Working Paper Series 2737, European Central Bank.
    12. Patrick E. McCabe, 2010. "The cross section of money market fund risks and financial crises," Finance and Economics Discussion Series 2010-51, Board of Governors of the Federal Reserve System (U.S.).

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    More about this item

    Keywords

    Money market funds; liquidity crisis; strategic complementarities; runs; narrow banking;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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