The Hidden Impact of Private Money Creation on Stock Returns

How are the FinTech-led cash investing impacting the performance of stocks? Are FinTech revolutions in money market funds improving price efficiency in the eco-system?

Abstract

Private money creation in the form of money market funds exerts its hidden impact on stock returns via the “dual-market clientele”—a subset of investors who systematically exploit the distinctive features of cash investing (as opposed to stock investing). This clientele-based channel has the power to explain the stylized seasonality: Long-short anomaly strategies that buy non-speculative stocks and sell speculative stocks experience low Monday-through-Wednesday returns and high Thursday-through-Friday returns. Using the FinTech revolution of cash investing as an exogenous shock to dual-market clientele’s market participation, we provide difference-in-differences evidence that the cross-sectional seasonality is amplified by more than 100 percent following the shock. The enlarged seasonality comes from the short-leg speculative stocks, and is stronger in high volatility and uncertainty periods.