Limits to Cryptocurrency Arbitrage

Rapid growth of cryptocurrencies has drawn the attention of practitioners, regulators, and scholars. The trading venues for these digital assets display a number of features that make them a sui generis laboratory for studying price formation and market efficiency. One notable feature of cryptocurrency is high and strongly time-varying yields, whether measured by APRs offered on staking sites, secured borrowing costs, or apparent contango of the futures curve. This study will help understand the nature of these yields-–what drives their levels and variation, and how they can persist despite arbitrage pressures. Drawing on the limits to arbitrage literature, we will explore cross exchange, cross product, and cross time variation in the implied yields of cryptocurrencies. Our preliminary results of a series of event studies suggest that cryptocurrency yields are highly sensitive to changes in market conditions such as shifts in regulatory frameworks and issuance of close substitutes.

Faculty Supervisor:

Will Gornall

Student:

Partner:

AquaNow

Discipline:

Business

Sector:

Professional, scientific and technical services

University:

The University of British Columbia

Program: