Staff Reports
Competition, Reach for Yield, and Money Market Funds
December 2015 Number 753
Revised January 2017
JEL classification: G00, G20, G23

Author: Gabriele La Spada

Do asset managers reach for yield because of competitive pressures in a low interest 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.

Available only in PDFpdf 119 pages / 1,577 kb
Author disclosure statement(s)
E-mail Alerts