Report
Competition, reach for yield, and money market funds
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;
JEL Classification: G23; G00; G20;
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Provider: Federal Reserve Bank of New York
Part of Series: Staff Reports
Publication Date: 2017-01-01
Number: 753
Pages: 119 pages