Quotation Hautsch, Nikolaus, Scheuch, Christoph, Voigt, Stefan. 2018. Limits to Arbitrage in Markets with Stochastic Settlement Latency.


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Abstract

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.

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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Working/discussion paper, preprint
Language English
Title Limits to Arbitrage in Markets with Stochastic Settlement Latency
Year 2018
URL https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3302159
JEL G00, G10, G14

Associations

People
Hautsch, Nikolaus (Details)
Scheuch, Christoph (Details)
Voigt, Stefan (Former researcher)
Organization
Institute for Financial Research IN (Details)
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