Valuation discrepancies in money market funds during market disruptions: evidence from Egypt


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Money market funds (MMFs) are generally considered safe investment vehicles, but the 2008 global financial crisis showed their vulnerability during market disruptions resulting in increased regulatory oversight across developed markets to protect investors. This paper examines the effect of MMF accounting regulation on investors in an emerging market context. It hypothesizes that the continued use of amortized cost methods to account for MMFs’ Net Asset Value (NAV) during market disruptions can result in unfair treatment of investors. The Egyptian money market provided a unique laboratory to test this hypothesis over a prominent economic crisis that combined high levels of interest rate volatility with a redemption-only structure for MMFs. A model that measures the discrepancies between the amortized and floating market NAVs per certificate for various money market portfolios (MMPs) simulating MMFs of different durations is tested using the Egyptian data. A sharp rise in interest rates is found to lead to significant discrepancies between the amortized NAV per certificate relative to their floating value. Serial investor redemptions of the certificates compound the discrepancies, but only certificate holders remaining in the funds bear the accumulated losses, which are augmented for portfolios with higher durations. The results suggest that emerging market regulators consider introducing the rules that switch to floating NAV calculations for MMFs during such periods to promote equality across all investors.

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    • Figure 1. Egyptian MMFs’ annual outstanding certificates, redemptions, and subscriptions from 2014 to 2018
    • Figure 2. Treasury yields (%) and NAV discrepancies (%) for selected simulated MMPi
    • Figure 3. Floating yields (%) and profits/losses (EGP) for selected simulated portfolios MMPi
    • Table 1. Summary statistics of simulated money market portfolio
    • Table 2. Weekly profit/loss statistics per certificate for investors remaining in the portfolio
    • Table 3. Multivariate panel regression models explaining NAV discrepancies and profits/losses per certificate
    • Conceptualization
      Kariman Kordy, Eskandar Tooma
    • Data curation
      Kariman Kordy, Eskandar Tooma
    • Formal Analysis
      Kariman Kordy, Aliaa Bassiouny
    • Investigation
      Kariman Kordy, Aliaa Bassiouny
    • Methodology
      Kariman Kordy, Aliaa Bassiouny, Eskandar Tooma
    • Software
      Kariman Kordy
    • Supervision
      Kariman Kordy, Eskandar Tooma
    • Validation
      Kariman Kordy, Eskandar Tooma
    • Visualization
      Kariman Kordy
    • Writing – original draft
      Kariman Kordy, Aliaa Bassiouny
    • Project administration
      Aliaa Bassiouny
    • Writing – review & editing
      Aliaa Bassiouny