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Working Paper
Adverse Selection Dynamics in Privately-Produced Safe Debt Markets
Privately-produced safe debt is designed so that there is no adverse selection in trade. This is because no agent finds it profitable to produce private information about the debt’s backing and all agents know this (i.e., it is information-insensitive). But in some macro states, it becomes profitable for some agents to produce private information, and then the debt faces adverse selection when traded (i.e., it becomes information-sensitive). We empirically study these adverse selection dynamics in a very important asset class, collateralized loan obligations, a large symbiotic appendage of ...
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Investors’ appetite for money-like assets: the money market fund industry after the 2014 regulatory reform
This paper uses a quasi-natural experiment to estimate the premium investors are willing to pay to hold money-like assets. The 2014 SEC reform of the money market fund (MMF) industry reduced the money-likeness only of prime MMFs, by increasing the information sensitivity of their shares, and left government MMFs unaffected. As a result, investors fled from prime to government MMFs, with total outflows exceeding $1 trillion. By comparing investors’ response to the regulatory change with past episodes of industry dislocation (for example, the 2008 MMF run), we highlight the difference between ...
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Investor Attention to Bank Risk During the Spring 2023 Bank Run
We track investor perceptions of bank risk during the 2023 bank run using “balance sheet betas” — the covariance of a bank’s stock returns with returns on factors based on uninsured deposits and unrealized securities losses in 2022Q3. Betas are mostly zero before the run but rise significantly during it, and even further when a bank is in the news. These increases are only weakly related to bank fundamentals. Once the Fed’s liquidity support is announced, betas become insensitive to losses on eligible collateral. Public news and government interventions, rather than fundamentals ...