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Discussion Paper
Herd Behavior in Financial Markets
Cipriani, Marco; Guarino, Antonio (2015-03-09)
Over the last twenty-five years, there has been a lot of interest in herd behavior in financial markets—that is, a trader’s decision to disregard her private information to follow the behavior of the crowd. A large theoretical literature has identified abstract mechanisms through which herding can arise, even in a world where people are fully rational. Until now, however, the empirical work on herding has been completely disconnected from this theoretical analysis; it simply looked for statistical evidence of trade clustering and, when that evidence was present, interpreted the clustering ...
Liberty Street Economics , Paper 20150309

Discussion Paper
Banks’ Balance-Sheet Costs and ON RRP Investment
Afonso, Gara; Cipriani, Marco; Huang, Catherine; La Spada, Gabriele (2023-05-18)
Daily investment at the Federal Reserve’s Overnight Reverse Repo (ON RRP) facility increased from a few billion dollars in March 2021 to more than $2.3 trillion in June 2022 and has stayed above $2 trillion since then. In this post, which is based on a recent staff report, we discuss two channels—a deposit channel and a wholesale short-term debt channel—through which banks’ balance-sheet costs have increased investment by money market mutual funds (MMFs) in the ON RRP facility.
Liberty Street Economics , Paper 20230518

Report
The minimum balance at risk: a proposal to mitigate the systemic risks posed by money market funds
Cipriani, Marco; Holscher, Michael; Martin, Antoine; McCabe, Patrick E. (2012-07-01)
This paper introduces a proposal for money market fund (MMF) reform that could mitigate systemic risks arising from these funds by protecting shareholders, such as retail investors, who do not redeem quickly from distressed funds. Our proposal would require that a small fraction of each MMF investor's recent balances, called the "minimum balance at risk" (MBR), be demarcated to absorb losses if the fund is liquidated. Most regular transactions in the fund would be unaffected, but redemptions of the MBR would be delayed for thirty days. A key feature of the proposal is that large redemptions ...
Staff Reports , Paper 564

Discussion Paper
Monetary Policy Transmission and the Size of the Money Market Fund Industry: An Update
Afonso, Gara; Cipriani, Marco; Huang, Catherine; Hussein, Abduelwahab; La Spada, Gabriele (2023-04-03)
The size of the money market fund (MMF) industry co-moves with the monetary policy cycle. In a post published in 2019, we showed that this co-movement is likely due to the stronger response of MMF yields to monetary policy tightening relative to bank deposit rates, combined with MMF shares and bank deposits being close substitutes from an investor’s perspective. In this post, we update the analysis and zoom in to the current monetary policy tightening by the Federal Reserve.
Liberty Street Economics , Paper 20230403

Report
Runs and Flights to Safety: Are Stablecoins the New Money Market Funds?
Macchiavelli, Marco; Eisenbach, Thomas M.; Anadu, Kenechukwu E.; Cipriani, Marco; La Spada, Gabriele; Wang, J. Christina; Huang, Catherine; Malfroy-Camine, Antoine; Azar, Pablo D.; Landoni, Mattia (2023-09-01)
Similar to the more traditional money market funds (MMFs), stablecoins aim to provide investors with safe, money-like assets. We investigate similarities and differences between these two investment products. Like MMFs, stablecoins suffer from “flight-to-safety” dynamics: we document net flows from riskier to safer stablecoins on days of crypto-market stress and estimate a discrete “break-the-buck” threshold of $1, below which stablecoin redemptions accelerate. We then focus on two specific stablecoin runs, in 2022 and 2023, showing that the same flight-to-safety dynamics also ...
Staff Reports , Paper 1073

Report
Risk Preferences at the Time of COVID-19: An Experiment with Professional Traders and Students
Cipriani, Marco; http://fedora:8080/fcrepo/rest/objects/authors/; Angrisani, Marco; Ortiz de Zarate Pina, Julen; Guarino, Antonio (2020-05-01)
We study whether the COVID-19 pandemic has impacted risk preferences, comparing the results of experiments conducted before and during the outbreak. In each experiment, we elicit risk preferences from two sample groups: professional traders and undergraduate students. We find that, on average, risk preferences have remained constant for both pools of participants. Our results suggest that the increases in risk premia observed during the pandemic are not due to changes in risk appetite; rather, they are solely due to a change in beliefs by market participants. The findings of our paper support ...
Staff Reports , Paper 927

Report
Trading by Professional Traders: An Experiment
Cipriani, Marco; http://fedora:8080/fcrepo/rest/objects/authors/; De Filippis, Roberta; Guarino, Antonio (2020-08-01)
We examine how professional traders behave in two ﬁnancial market experiments; we contrast professional traders’ behavior to that of undergraduate students, the typical experimental subject pool. In our first experiment, both sets of participants trade an asset over multiple periods after receiving private information about its value. Second, participants play the Guessing Game. Finally, they play a novel, individual-level version of the Guessing Game and we collect data on their cognitive abilities, risk preferences, and conﬁdence levels. We ﬁnd three diﬀerences between traders and ...
Staff Reports , Paper 939

Discussion Paper
Money Market Funds and Systemic Risk
Cipriani, Marco; Holscher, Michael; Martin, Antoine; McCabe, Patrick E. (2012-06-11)
On September 16, 2008, Reserve Primary Fund, a money market fund (MMF) with $65 billion in assets under management, announced that losses in its portfolio had caused the value of shares in the fund to drop from $1.00 to $0.97. The news that an MMF had ?broken the buck? spread panic quickly to other MMFs. In the two days following Reserve?s announcement, investors withdrew approximately $200 billion (10 percent of assets) from so-called ?prime? MMFs, which, like Reserve, mainly invest in privately issued short-term securities. The massive redemptions and resulting strains on MMFs contributed ...
Liberty Street Economics , Paper 20120611

Report
Endogenous Leverage and Default in the Laboratory
Houser, Daniel; Fostel, Ana; Cipriani, Marco (2019-11-01)
We study default and endogenous leverage in the laboratory. To this purpose, we develop a general equilibrium model of collateralized borrowing amenable to laboratory implementation and gather experimental data. In the model, leverage is endogenous: agents choose how much to borrow using a risky asset as collateral, and there are no ad hoc collateral constraints. When the risky asset is financial?namely, its payoff does not depend on ownership (such as a bond)? collateral requirements are high and there is no default. In contrast, when the risky asset is nonfinancial?namely, its payoff ...
Staff Reports , Paper 900

Report
Financial Sanctions, SWIFT, and the Architecture of the International Payments System
Cipriani, Marco; Goldberg, Linda S.; La Spada, Gabriele (2023-01-01)
Financial sanctions, alongside economic sanctions, are components of the toolkit used by governments as part of international diplomacy. The use of sanctions, especially financial, has increased over the last seventy years. Financial sanctions have been particularly important whenever the goals of the sanctioning countries were related to democracy and human rights. Financial sanctions restrict entities—countries, businesses, or even individuals—from purchasing or selling financial assets, or from accessing custodial or other financial services. They can be imposed on a sanctioned ...
Staff Reports , Paper 1047

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