NY Fed on Money-Like Premium
The Federal Reserve Bank of New York's Liberty Street Economics blog posted a piece, entitled, "The Premium for Money-Like Assets." Written by Marco Cipriani and Gabriele La Spada, it says, "Several academic papers have documented investors' willingness to pay a premium to hold money-like assets and focused on its implications for financial stability. In a New York Fed staff report, we estimate such premium using a quasi-natural experiment, the recent reform of the money market fund (MMF) industry by the Securities and Exchange Commission (SEC).... As discussed in a previous Liberty Street Economics blog post, the reform, which went into effect in October 2016, affected different segments of the MMF industry differently. In particular, prime MMFs were forced to adopt a system of gates and fees; moreover, prime MMFs catering to institutional investors were forced to float their net asset values. In contrast, government MMFs were unaffected by the new regulation." The blog asks, "Why can the effects of the MMF reform help us understand investors' preference for money-like assets?" It explains, "A salient characteristic of money-like assets is their information insensitivity: for an asset to be used in transactions, agents must not worry about its future value. For this reason, money-like assets are usually short-term, liquid, debt like securities. Before the SEC reform, MMF shares were the typical example of a money like asset: they were callable, redeemable at par, and had very little (at least, in investors' perception) credit risk. This applied equally to government funds, which can only invest in Treasuries, agency debt, and repos collateralized by these securities, and to prime funds, which can also invest in high-quality, privately-issued unsecured debt. It also applied equally to funds with a retail clientele (retail funds) and those with an institutional clientele (institutional funds)." The NY Fed economists tells us, "By forcing prime MMFs to adopt a system of gates and fees, the SEC made prime funds less money-like than government funds. And by forcing prime institutional MMFs to adopt a floating net asset value, the reform made institutional prime funds even less money-like.... In our paper, we exploit the differential impact of the SEC reform on the different segments of the MMF industry as a quasi-natural experiment to estimate the premium investors are willing to pay for money-likeness. In particular, we look at the difference between the net yield offered by prime MMFs and that offered by government MMFs (the net-yield spread) and test whether such difference increased around the implementation of the reform (that is, we employ a difference-in-differences approach). Holding everything else constant, if investors value the money-likeness of their MMF shares, we expect the net-yield spread between prime and government MMFs to widen, and to do so to a greater extent for institutional funds." The blog concludes, "The post-crisis SEC reform of the MMF industry affected the various segments of the MMF industry differently, providing researchers with a unique opportunity to estimate the premium that investors are willing to pay to hold money-like assets through a quasi-natural experiment. The increase in the spread between prime and government MMFs around the regulatory change shows that such premium is statistically significant and quantitatively important."
