The Liquidity Premium of Digital Payment Vehicle

Zefeng Chen () and Zhengyang Jiang ()
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Zefeng Chen: Guanghua School of Management, Peking University, Beijing 100871, China
Zhengyang Jiang: Kellogg School of Management, Northwestern University, and NBER, Evanston, Illinois 60208

Management Science, 2025, vol. 71, issue 7, 5605-5624

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 model, we show that this size increase implies a liquidity premium of 0.8% per annum. This result provides a unique perspective for understanding and calibrating the liquidity premium of digital currencies.

Keywords: digital payment; liquidity premium; money market fund; fintech (search for similar items in EconPapers)
Date: 2025
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