Market Power and Money Market Funds Risk-Taking

Yue Cai
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Yue Cai: Faculty of Economics, Gakushuin University

No 2411, Working Papers from Waseda University, Faculty of Political Science and Economics

Abstract: This paper investigates the relationship between market power and risk-taking behavior in China's money market funds. Using a dual methodological approach that combines demand estimation and a natural experiment, we demonstrate that increased market power significantly decreases funds' risk-taking. Our analysis proceeds in two stages: 1) We derive fund-specific investor elasticities through demand estimation as a measure of market power. 2) We exploit the staggered introduction of MMFs for digital transactions on Alipay, the world's largest digital payment platform, as a natural experiment. Our findings reveal that upon becoming eligible for digital transactions, funds experience a decrease in investors' demand elasticity; this increase in market power subsequently leads to reduced risk-taking behavior.

Pages: 37 pages
Date: 2025-01
New Economics Papers: this item is included in nep-fmk
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