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07-11-2023

The response of money market fund investors and managers to government shutdowns

Authors: Kyle D. Allen, Ahmed Baig, Drew B. Winters

Published in: Journal of Economics and Finance

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Abstract

We examine whether impending government shutdowns affect money market fund (MMF) investors and managers. Research suggests that market participants place increased risk on US Treasury Bills around government shutdown periods. There are three sets of decision makers in our sample: retail MMF investors, institutional MMF investors, and MMF investment managers. We ask the question; as the country moves toward a federal government shutdown do investors exit MMFs and do MMF managers shorten their maturities? In general, we find that fund managers did little to respond to government shutdowns. Institutional investors withdrew funds from MMFs (both Government and Prime). Retail investors moved funds into MMFs and moved into both Prime and Government funds.

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Appendix
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Footnotes
1
Kidwell et al. (2000) explain this point.
 
2
Reserve Primary was the first MMF and it was launched in 1970 at a time of rising inflation rates with Regulation Q limiting interest rates on bank deposits. See, Akay et al. (2014) for a discussion of the rise and fall of Reserve Primary.
 
3
Kacperczyk and Schnabl (2013) report total redemption following Reserve Primary breaking the buck of more than $300 billion.
 
4
The Asset-backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) is a Federal Reserve Financial Crisis program that purchased ABCP from MMFs.
 
7
Zivney and Marcus (1989), Nippani et al. (2001) and Liu et al. (2009) are part of the literature on Treasury defaults. However, these three papers examine debt ceiling violations, so they are not included in our review of government shutdowns.
 
8
See, Allen, Saha, Whitledge and Winters (2023) for a more detailed discussion of the 2010 and 2014 changes to rule 2a-7.
 
9
The 2010 rule change notes: “Unlike weighted average maturity, the weighted average life (or ‘‘WAL’’) of a portfolio is measured without reference to any rule 2a–7 provision that otherwise permits a fund to shorten the maturity of a security by reference to its interest rate reset dates.”
 
10
Barber and Odean (2000) find that retail investors at a discount brokerage underperform the market, in part, because they trade too much. These are characteristics of uninformed traders.
 
12
See, page 202 of SEC document title Money Market Fund Reform; Amendments to Form PF.
 
13
The 2014 SEC rule defines a government security as “…backed by the full faith and credit of the U.S. government”.
 
14
See Gallagher and Collins (2016) for a detailed description on using WAL as a control.
 
16
For robustness, we run all our regressions using the fund 30-day gross yield in place of the 4-week T-bill rate. All results are qualitatively similar to report results.
 
17
See Strahan and Tanyeri (2015); Kacperczyk and Schnabl (2013).
 
18
A parameter estimate that is statistically insignificant cannot be differentiated from zero. Zero does not have a sign and therefore an insignificant parameter estimate cannot change signs.
 
19
We have included the results of our means difference tests in the appendix. Tables 8 and 9 show the results. These results support the results from our regressions. We have detailed them in matrix form to assist in readability.
 
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Metadata
Title
The response of money market fund investors and managers to government shutdowns
Authors
Kyle D. Allen
Ahmed Baig
Drew B. Winters
Publication date
07-11-2023
Publisher
Springer US
Published in
Journal of Economics and Finance
Print ISSN: 1055-0925
Electronic ISSN: 1938-9744
DOI
https://doi.org/10.1007/s12197-023-09651-w