Run on Money Market Mutual Funds: Old Fashioned Panic or Rational Response

Money market mutual funds (MMMFs) constitute one of the largest parts of modern financial system. Their nature is such that for a long time they were seen as perfectly safe investment, on par with insured banks. However, dramatic events of the financial crisis of 2007-2008 result in what was called run on MMMFs. This run on MMMFs which occurred in September 2008 was one of the most important parts of financial crisis of 2007-2008. This paper attempts to understand why large scale withdrawals from MMMFs occurred and if these withdrawals followed some clear pattern. In order to do this I construct several models which test whether runs on MMMFs were discriminate or indiscriminate in relation to their portfolio holdings. These models are tested on novel dataset. Results of these tests proved to be conclusive only partly, as time variables indicate that in at least one week of September 2008 the runs were indiscriminate, but concerns about the correctness of the specification remains.