UCL School of Management, The Centre for Finance, and the Department of Economics are delighted to welcome Gabriele La Spada, Federal Reserve Bank of New York, to host a seminar presenting ‘Investors’ Appetite for Money-Like Assets’.
This paper uses a quasi-natural experiment to estimate the premium investors are willing to pay to hold money-like assets. The 2014 SEC reform of the money market fund (MMF) industry reduced the money-likeness of prime MMFs by increasing the information sensitivity of their shares, while leaving government MMFs unaffected. As a result, investors fled from prime to government MMFs, with total outflows exceeding 1 trillion dollars. Using a difference-in-differences design that exploits the differential treatment of prime and government MMFs, as well as institutional and retail share classes, we estimate the premium for money-likeness to be 20 basis points for retail investors and 30 basis points for institutional ones. We show that these premia are not due to changes in investors’ risk tolerance or funds’ risk taking. Using family specialization as an instrument for fund yields, we identify the elasticity of substitution between prime and government institutional MMF shares before and after the rule’s implementation: the regulation caused the elasticity to decrease from 0.51 to 0.11. Our results support recent developments in monetary theory that identify information insensitivity as a key feature of money priced by the market.