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Do Low Rates Encourage Yield Seeking by Money Market Funds?
The term ?reach for yield? refers to investors? tendency to buy riskier assets in hopes of securing higher returns. Do low rates on safe assets encourage such yield-seeking behavior, particularly among U.S. prime money market funds (MMFs)? In a forthcoming paper in the Journal of Financial Economics, I develop a model of MMF competition to understand whether competitive pressure leads these funds to reach for yield in a low-rate environment like the current one. I test the model?s predictions on the 2002-08 period and show that, after controlling for changes in risk premia, declines in ...