Competition, Reach for Yield, and Money Market Funds

121 Pages Posted: 10 Dec 2015 Last revised: 30 Aug 2017

See all articles by Gabriele La Spada

Gabriele La Spada

Federal Reserve Banks - Federal Reserve Bank of New York

Date Written: 2015-12-08

Abstract

Do asset managers reach for yield because of competitive pressures in a low-rate environment? I propose a tournament model of money market funds (MMFs) to study this issue. When funds care about relative performance, an increase in the risk premium leads funds with lower default costs to increase risk-taking, while funds with higher default costs decrease risk-taking. Without changes in the premium, lower risk-free rates reduce the risk-taking of all funds. I show that these predictions are consistent with MMF risk-taking during the 2002-08 period and that rank-based performance is indeed a key determinant of money flows to MMFs..

Keywords: reach for yield, money market funds

JEL Classification: G00, G20, G23

Suggested Citation

La Spada, Gabriele, Competition, Reach for Yield, and Money Market Funds (2015-12-08). FRB of NY Staff Report No. 753, Available at SSRN: https://ssrn.com/abstract=2701192

Gabriele La Spada (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-5164 (Phone)

HOME PAGE: http://https://www.newyorkfed.org/research/economists/laspada

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