NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Implicit Guarantees and Risk Taking: Evidence from Money Market Funds

Marcin Kacperczyk, Philipp Schnabl

NBER Working Paper No. 17321
Issued in August 2011
NBER Program(s):   AP   CF   ME

A firm's termination generates bankruptcy costs. This may create incentives for a firm's owner to bail out a firm in bankruptcy and to curb the firm's risk taking outside bankruptcy. We analyze the role of such implicit guarantees in the context of financial institutions that sponsor money market mutual funds. Our identification strategy exploits a large, exogenous expansion in risk-taking opportunities of money market funds during the period of August 2007 to August 2008. We find that a fund's response to the expansion depends on its sponsor's ability to provide implicit guarantees: Funds sponsored by financial institutions with higher equity take on less risk than those sponsored by financial institutions with lower equity. Moreover, fund sponsors with higher equity are more likely to provide financial support to their funds during a market-wide run in September 2008. The difference in risk taking disappears once implicit guarantees by fund sponsors are replaced with an explicit government guarantee. Overall, our findings suggest that implicit guarantees may reduce, rather than increase, risk taking.

You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.

Information about Free Papers

You should expect a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.

E-mail:

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Users who downloaded this paper also downloaded these:
Amromin, Huang, Sialm, and Zhong w17315 Complex Mortgages
Barro and Ursua w17328 Rare Macroeconomic Disasters
Taylor and Williams w13943 A Black Swan in the Money Market
Kacperczyk and Schnabl w15538 When Safe Proved Risky: Commercial Paper During the Financial Crisis of 2007-2009
Andreoni and Sprenger w17342 Uncertainty Equivalents: Testing the Limits of the Independence Axiom
 
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