Kim, Hugh Hoikwang
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PublicationTime is Money: Life Cycle Rational Inertia and Delegation of Investment Management(2013-11-01) Kim, Hugh Hoikwang; Maurer, Raimond; Mitchell, Olivia SWe investigate the theoretical impact of including two empirically-grounded insights in a dynamic life cycle portfolio choice model. The first is to recognize that, when managing their own financial wealth, investors incur opportunity costs in terms of current and future human capital accumulation, particularly if human capital is acquired via learning by doing. The second is that we incorporate age-varying efficiency patterns in financial decisionmaking. Both enhancements produce inactivity in portfolio adjustment patterns consistent with empirical evidence. We also analyze individuals’ optimal choice between self-managing their wealth versus delegating the task to a financial advisor. Delegation proves most valuable to the young and the old. Our calibrated model quantifies welfare gains from including investment time and money costs, as well as delegation, in a life cycle setting. PublicationContagious Runs in Money Market Funds and the Impact of a Government Guarantee(2013-10-01) Kim, Hugh HoikwangDespite a vast theoretical literature on contagious behavior of investors, little is known about its empirical evidence in a real financial crisis setting. This paper examines evidence for contagious runs in money market funds during the 2008 financial crisis, drawing on a rich data set tracking U.S. money market funds’ daily flows and their enrollment statuses in the Treasury Department’s Temporary Guarantee Program (TGP). Evaluating the positive externality effect from a peer fund’s enrollment in the TGP on non-enrolled funds, we show that panic-driven runs were contagious across funds. We find that funds’ stability due to their enrollment in the guarantee program spilled over and enhanced daily flows to a non-enrolled fund by $1.8 million compared to already-enrolled funds. Moreover, we find that retail investors were less likely than institutional investors to return to prime money market funds even after enrollment in the guarantee program, implying that the latter benefited more from the government back-stop. Results are germane to policies seeking to rebuild investor confidence in times of financial crises and reduce the chance of future contagion in this industry.