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Sophisticated and Unsophisticated Runs in Money Market Mutual Funds

Summary:
Before 2008 crisis, runs in financial markets were mostly limited to banks. In 2008 crisis we saw runs on mutual funds typically money market MFs. Marco Cipriani and Gabriele La Spada in this NY Fed paper look at MF runs in 2020 during the outbreak of pandemic: This paper characterizes the run behavior of sophisticated (institutional) and unsophisticated (retail) investors by studying the runs on prime money market funds (MMFs) of March 2020, at the beginning of the COVID-19 pandemic. For both U.S. and European institutional prime MMFs, the runs were more severe in funds for which the imposition of redemption gates and fees was a material possibility because of their lower liquidity positions. In contrast, although U.S. retail prime MMFs are also required to adopt the same system of

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Before 2008 crisis, runs in financial markets were mostly limited to banks. In 2008 crisis we saw runs on mutual funds typically money market MFs.

Marco Cipriani and Gabriele La Spada in this NY Fed paper look at MF runs in 2020 during the outbreak of pandemic:

This paper characterizes the run behavior of sophisticated (institutional) and unsophisticated (retail) investors by studying the runs on prime money market funds (MMFs) of March 2020, at the beginning of the COVID-19 pandemic. For both U.S. and European institutional prime MMFs, the runs were more severe in funds for which the imposition of redemption gates and fees was a material possibility because of their lower liquidity positions. In contrast, although U.S. retail prime MMFs are also required to adopt the same system of gates and fees, their outflows did not depend on fund liquidity; unsophisticated (retail) investors ran more often if their funds belonged to a family offering institutional prime MMFs and suffering larger institutional redemptions. Finally, across investor types, MMFs belonging to families with a larger offering of government MMFs experienced larger outflows; this result is consistent with lower switching costs in fund families that are more specialized in government funds.

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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