Extracting shadow exchange rates and foreign exchange premia during currency crises: an example from Egypt

Bassiouny, Aliaa; Tooma, Eskandar

doi:10.1080/13504851.2018.1433291

Cited by 3 publications

(2 citation statements)

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“…A second valuable feature justifies the chosen sample period: Because the CBE had imposed several interest rate hikes to manage the severe economic and political crisis that the country faced following the Arab Spring movement in January 2011, the period was characterized by a high level of interest rate volatility. The crisis resulted in hard currency shortages and tough monetary policy actions by the CBE to limit dollarization and strengthen the EGP (Bassiouny & Tooma, 2019).…”

Section: Literature Reviewmentioning

confidence: 99%

“…Money market funds (MMFs) are considered one of the most accessible savings mechanisms for retail investors (Rosen & Katz, 1983), globally reaching approximately USD 6 trillion in assets under management by the first quarter of 2018 (Investment Company Fact Book, 2018). One main reason for the growth stems from the ability of MMFs to preserve their Net Asset Value (NAV) per certificate, which is possible because MMFs invest in high quality, liquid, and short-term fixed-income securities, allowing fund managers to calculate each fund's NAV per certificate at the amortized (book) value rather than at the floating (market) value of the underlying investments 1 . In stable market conditions, this accounting treatment is reasonable, but during times of market disruption and friction, it can result in losses to investors who remain in the funds.…”

Section: Introductionmentioning

confidence: 99%

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

Kordy

Bassiouny

Tooma

2020

Investment Management and Financial Innovations

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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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Section: Literature Reviewmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%