Money Market Funds and the Pricing of Near-Money Assets

Sebastian Doerr, Egemen Eren and Semyon Malamud
Additional contact information
Egemen Eren: Bank for International Settlements
Semyon Malamud: Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute

No 23-04, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: US money market funds (MMFs) play an important role in short-term markets as large investors of Treasury bills (T-bills) and repurchase agreements (repos) with banks and the Federal Reserve, some of the world’s safest and most liquid assets. We build a theoretical model in which MMFs’ strategic interactions generate a trade-off between their market power in the repo market and their price impact in the T-bill market. Empirically, we show that MMFs’ portfolio allocation decisions between repos and T-bills have an economically significant impact on T-bill rates and market liquidity, and the liquidity premium on T-bills. Guided by our model, we devise instrumental variables to establish a causal effect. Using a granular holding-level dataset we confirm the model’s prediction that MMFs internalize their price impact in the T-bill market when they set repo rates. Moreover, when Treasury market liquidity is low, MMFs tilt their portfolios away from T-bills towards repos with the Federal Reserve. Our results have broad implications.

Keywords: T-bills; repo; market power; price impact; liquidity premium; money market funds (search for similar items in EconPapers)
JEL-codes: E44 G11 G12 G23 (search for similar items in EconPapers)
Pages: 67 pages
Date: 2023-01
New Economics Papers: this item is included in nep-ban, nep-fmk and nep-mon
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Citations: View citations in EconPapers (3)

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https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4341230 (application/pdf)

Related works:
Working Paper: Money Market Funds and the Pricing of Near-Money Assets (2024)
Working Paper: Money market funds and the pricing of near-money assets (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2304

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