| dc.description.abstract | Abstract chapter 1: Prime money market funds (MMFs) frequently receive support from their sponsors during periods of acute market stress. While sponsor support can help restore investor confidence in the fund, it also poses a moral hazard by distorting the market discipline of fund managers. This study exploits the Covid crisis of March 2020 to examine the implications of sponsor support for prime funds’ ex-ante risk-taking behavior and crisis outcomes. Consistent with the moral hazard hypothesis, I find that US-based prime MMFs affiliated with strong sponsors engage in higher ex-ante risk-taking behavior. During the crisis, investors do not deem the safety net of strong sponsors as credible, and run more intensely on their affiliate funds. I also examine the behavior of EU based prime funds, which are prohibited from seeking sponsor support. My results show no differences between sponsor strength, ex-ante risk-taking behavior, or the crisis outcomes for EU-based prime funds. Abstract chapter 2: We examine how dealer network position affects transaction costs when dealers provide immediacy by taking bonds into inventory. Dealers with central network positions provide more immediacy and revert deviations from their desired inventory faster than peripheral dealers do. The cost of immediacy decreases with centrality for customer trades (centrality discount) and increases with centrality for interdealer trades (centrality premium). These findings support recent network models in which central dealers have a comparative advantage in managing inventory. We isolate the inventory management channel and avoid confounding effects from adverse selection and heterogeneous customer clienteles by using trades around bond index exclusions. Abstract chapter 3: We examine the role of collateral quality for the bidding behavior of banks in central bank liquidity auctions. Using a novel dataset on banks’ collateral pledging and bidding behavior, we show that banks exhibit strategic behavior in their collateral pledging decision. Specifically, banks pledge collateral with a lower outside option with the central bank. Moreover, we find that smaller banks with higher leverage and lower-quality collateral tend to draw disproportionally larger liquidity in central bank liquidity auctions. However, the price of liquidity is unrelated to the quality of pledged collateral. Our findings highlight the importance of the central bank collateral framework for liquidity provision. | |
