Risk Taking in Prime Money Market Funds and Investors’ Risk-Return Tradeoff
Prof. Jingrui XU
Assistant Professor of Finance
University of Macau
Date: 02 May 2025 (Friday)
Time: 15:00 to 16:00 pm
Venue: E22 – Lobby
Moderator: Prof. Rachel Xiaorong MA, Associate Professor of Finance
Abstract
This paper shows that investors’ risk-return tradeoff significantly affects risk taking of prime money market funds (MMFs). Our theory suggests that as yield spreads on risky money market instruments increase, MMFs reduce their risk taking—especially during economic stress—exploiting investor preferences to attract investments. However, this strategy lowers MMFs’ Sharpe ratios, implying investor welfare reduction and agency issues. Empirically, we find that MMFs decrease their holdings of floating-rate notes and bank obligations by 2.03% for a 1% increase in yield spreads. This decrease rises to 4.7% during economic stress. MMFs adopting this strategy attract more flows and increase profits.
Speaker
Professor Jingrui XU is an Assistant Professor in Finance at University of Macau. He obtained his PhD degree in Banking and Finance from the University of New South Wales. His research interests include fund management, financial markets, asset pricing, financial option and real option, and Bayesian techniques in finance and economics. He has published a paper on the Journal of Financial Economics.
All are welcome!
