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The Liquidity Premium of Digital Payment Vehicle

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  • Zefeng Chen
  • Zhengyang Jiang

Abstract

Do digital payment technologies generate liquidity premia like cash and Treasury? We provide an estimate in the context of the world’s largest digital payment platform, Alipay. Our empirical strategy exploits the variation in the timing of the introduction of money market funds that users on this platform can hold and use for digital transactions. We find that, once a fund becomes eligible for these transactions, its size increases by 45 times on average. Through the lens of an equilibrium demand system that models funds as imperfect substitutes, this size increase maps to a liquidity premium of about 0.8% per annum.

Suggested Citation

  • Zefeng Chen & Zhengyang Jiang, 2022. "The Liquidity Premium of Digital Payment Vehicle," CESifo Working Paper Series 9933, CESifo.
    • Handle: RePEc:ces:ceswps:_9933
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    Cited by:

    1. Cong, Lin William & Mayer, Simon, 2022. "The Coming Battle of Digital Currencies," Applied Economics and Policy Working Paper Series 320020, Cornell University, Department of Applied Economics and Management.

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    More about this item

    Keywords

    digital payment; liquidity premium; money market fund;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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