Market Efficiency and Money Market Fund Portfolio Managers: Beliefs Versus Reality

This paper develops two models of the money market mutual fund maturity decision. The first assumes that markets are efficient but that transactions are costly. The second model relies on a survey of fund managers to select variables that might permit exploiting perceived profit opportunities. Empirical tests provide strong support for the former model, but none for the latter. This can be interpreted as meaning that although managers may believe that financial markets are inefficient, margins are too small and competition too fierce for them to react aggressively on those beliefs. Any actions they do take to exploit alleged inefficiencies are not detectable in the data. In addition, the study finds that managers in the aggregate have no special ability to adjust their funds' maturity to capitalize on interest-rate changes.