I develop an equilibrium model of U.S. money market funds (MMFs) and use it to analyze the effect of recently proposed regulations on the liquidity provided by these funds and their fragility. The model captures some of the key institutional features of MMFs, such as the "breaking the buck" liquidation rule and voluntary sponsor support, and it is consistent with several stylized facts identified in the literature on MMFs. In the model, the MMF industry may be prone to runs different from the canonical bank runs. These are not runs of investors on the MMFs but of the MMFs on the asset market. Moreover, the model shows that, even in a stylized setup, the policy analysis is complex. Regulation affects the payoffs from intermediation not only directly, but also through the fees, the sponsors' support decision, and asset prices, all of which are determined in equilibrium. The model takes into account general equilibrium effects that are not present in the current policy discussion and shows that they can overturn conventional intuition.
During the past few decades, the fraction of the equity market owned directly by individuals declined significantly. The same period witnessed investment trends that include the growth of indexing as well as shifts by active managers toward lower fees and more index-like investing. I develop an equilibrium model linking these investment trends to the decline in individual ownership, interpreting the latter as a reduction in noise trading. Active management corrects most noise-trader induced mispricing, and the fraction left uncorrected shrinks as noise traders' stake in the market declines. Less mispricing then dictates a smaller footprint for active management.