Prime Time for Prime Funds : Floating NAV, Intraday Redemptions and Liquidity Risk During Crises

Investor concerns surrounding the COVID-19 pandemic triggered large fund outflows from prime institutional money market funds (PIFs) during March 2020. This episode highlights the continued susceptibility of such funds to financial market stress. In this paper we present novel evidence on the effectiveness of the recent money market fund reforms in ensuring the funds' stability and liquidity during periods of stress. In particular, we provide evidence on the effectiveness of floating net asset values (NAVs) in mitigating the investor run-like behavior during crises. Our evidence covers two distinct periods of financial stress: (1) the COVID-19 related shock of March 2020, and (2) the near-default of U.S. government debt during the debt ceiling crisis of December 2017 - February 2018.Our analysis offers a first look at a recent industry innovation, namely, funds offering intraday share redemption. Consistent with a theoretical model, we find that funds that offer multiple intraday NAVs and redemptions (multiple strikes) are subject to significantly larger outflows during periods of market stress, compared to funds offering end-of-day NAV and share redemption (single strike funds). Our results suggest that the introduction of floating NAVs has not eliminated the strategic complementarities in the redemption decisions of institutional investors - investors still have an incentive to redeem early, especially during periods of low secondary market liquidity