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Investor size, liquidity and prime money market fund stress

Summary:
Fernando Avalos and Dora Xia in this BIS research: Massive redemptions at money market funds (MMFs) investing primarily in high-quality short-term private debt securities were an important feature of the market dislocations in March 2020. Building on previous studies of the underlying drivers, we find that large investors’ withdrawals did not differentiate across prime institutional MMFs according to these funds’ asset liquidity positions. We also find that, faced with large redemptions, the managers of these funds disposed of the less liquid securities in their portfolios, marking a departure from their behaviour in tranquil times. This is likely to have exacerbated market-wide liquidity shortages. After the Federal Reserve’s announcement of the Money Market Mutual Fund Liquidity

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Fernando Avalos and Dora Xia in this BIS research:

Massive redemptions at money market funds (MMFs) investing primarily in high-quality short-term private debt securities were an important feature of the market dislocations in March 2020. Building on previous studies of the underlying drivers, we find that large investors’ withdrawals did not differentiate across prime institutional MMFs according to these funds’ asset liquidity positions. We also find that, faced with large redemptions, the managers of these funds disposed of the less liquid securities in their portfolios, marking a departure from their behaviour in tranquil times. This is likely to have exacerbated market-wide liquidity shortages. After the Federal Reserve’s announcement of the Money Market Mutual Fund Liquidity Facility, all funds strengthened their liquidity positions, with those hardest-hit by outflows attempting to catch up with peers.1

I had pointed to another research on money market MFs during the pandemic distinguishing between . Research on MMMFs became important after the run on MMMFs during the 2008 crisis and continues to be popular ever since.

Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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