Abstract: Monetary market funds can attract capital inflow from investors due to their low risk, good liquidity and ability to generate significant returns in short term, thus serving as an important tool for fund companies to increase their scale at quarter-end. This paper uses returns and holdings data of China’s monetary market funds from 2006 to 2018 as its sample to examine the funds’ quarter-end performance inflation behavior. The paper finds that the annualized rate of return of monetary market funds in the last two weeks of a year increases by 32.21 basis points, compared with other dates. The performance inflation is thereby significant. Monetary market funds are evaluated using the amortized cost method, where the investment gains or losses are not realized until assets disposal. Using short-term commercial paper’s issuance and trading data, the paper finds that for monetary market funds with large positions, the trading activeness of commercial paper is significantly higher at quarter-end than on other dates. Therefore, the performance inflation behavior affects the activeness of short-term commercial papers.

Key words: monetary market funds, amortized cost method, performance inflation, commercial papers, trading activeness