The dynamic relationship among the money market mutual funds, the commercial paper market, and the repo market

• Published in: The European journal of finance Vol. 25; no. 5; pp. 395 - 414
• Main Authors: Haghani Rizi, Majid, Kishor, N. Kundan, Marfatia, Hardik A.
• Format: Journal Article
• Language: English
• Published: London Routledge 24.03.2019; Taylor & Francis LLC
• Subjects: Assets; Banking system; cointegration; Commercial paper; Economic crisis; Economic models; money market fund; Money market mutual funds; Money markets; Mutual funds; repurchase agreement; Repurchase agreements; Shadow banking; trend-cycle decomposition
• ISSN: 1351-847X; 1466-4364
• DOI: 10.1080/1351847X.2018.1522359

In this paper, we present the short-run and the long-run relationships among the financial assets of the money market funds, the commercial paper market, and the repurchase agreement market by undertaking a cointegration analysis of quarterly data over the 1985-2017 period. This was based on the empirical observation that the commercial paper and repo markets account for 50 percent of the assets of money market funds. The evidence suggests that there exists a common long-term cointegrating trend among these three components of the shadow banking system. Any disequilibrium in this long-run relationship among these variables is corrected by movement in the financial assets of money market funds. The Beveridge-Nelson decomposition from the estimated cointegrating relationship shows that the cyclical component of money market funds is large and captures huge swings in these markets during the financial crisis. We also find evidence of change in these dynamic relationships in the post-crisis period, where in addition to the money market funds, the commercial paper market also exhibits a tendency to correct for the disequilbrium.