NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Forecasting Ability of Money Market Fund Managers and its Economic Value

Alex Kane, Young Ki Lee

NBER Working Paper No. 1243
Issued in December 1983
NBER Program(s):   ME

The model proposed by Merton(1981) to determine the value of forecasting ability is adapted to investigate whether money market fund managers successfully anticipate changes in the yield curve by adjusting the average maturity of their portfolios in the right direction. The potential economic value of such behavior is assessed, and it is shown that if the portfolios of all money market funds were aggregated it would appear that managers are good forecasters even if individually they possess insignifcant forecasting ability. At the same time, the economic value of the aggregate portfolio will be diminished because of the reduced net change in average maturity. Thus, diversifying into many money market funds will not attain the gain that could be realized if an individual manager had a forecasting ability equal to the quality of the average forecast.A sample of 34 money market funds is investigated. Analysis suggests that a small fraction of the funds exhibited forecasting skills, but even they generated negligible economic value because the changes in their portfolios average maturity were too small.There appears to be no relationship between forecasting ability and economic success of money market funds as measured by asset size and growth.

download in pdf format
   (397 K)

email paper

This paper is available as PDF (397 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w1243

Users who downloaded this paper also downloaded these:
Taylor and Williams w13943 A Black Swan in the Money Market
Ferson and Harvey w4622 Sources of Risk and Expected Returns in Global Equity Markets
Kacperczyk and Schnabl w17321 Implicit Guarantees and Risk Taking: Evidence from Money Market Funds
Kane, Marcus, and McDonald w1286 How Big is the Tax Advantage to Debt?
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us