Limits to arbitrage in markets with stochastic settlement latency
- Distributed ledger technologies rely on consensus protocols confronting traders with random waiting times until the transfer of ownership is accomplished. This time consuming settlement process exposes arbitrageurs to price risk and imposes limits to arbitrage. We derive theoretical arbitrage boundaries under general assumptions and show that they increase with expected latency, latency uncertainty, spot volatility, and risk aversion. Using high-frequency data from the Bitcoin network, we estimate arbitrage boundaries due to settlement latency of on average 124 basis points, covering 88% of the observed cross-exchange price differences. Settlement through decentralized systems thus induces non-trivial frictions affecting market efficiency and price formation.
Author: | Nikolaus HautschORCiDGND, Christoph Scheuch, Stefan Voigt |
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URN: | urn:nbn:de:hebis:30:3-480536 |
URL: | https://ssrn.com/abstract=3302159 |
Parent Title (English): | Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 616 |
Series (Serial Number): | CFS working paper series (616) |
Publisher: | Center for Financial Studies |
Place of publication: | Frankfurt, M. |
Document Type: | Working Paper |
Language: | English |
Year of Completion: | 2018 |
Year of first Publication: | 2018 |
Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
Release Date: | 2018/12/18 |
Tag: | Arbitrage; Blockchain; Distributed Ledger; Settlement Latency |
Issue: | December 3, 2018 |
Page Number: | 74 |
HeBIS-PPN: | 442846738 |
Institutes: | Wirtschaftswissenschaften / Wirtschaftswissenschaften |
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS) | |
Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
Sammlungen: | Universitätspublikationen |
Licence (German): | Deutsches Urheberrecht |