Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/130649
Authors: 
La Spada, Gabriele
Year of Publication: 
2015
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 753
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.
Subjects: 
reach for yield
money market funds
JEL: 
G00
G20
G23
Document Type: 
Working Paper

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