Building Trust takes Time: Limits to Arbirage for Blockchain-Based Assets
Research output: Working paper › Preprint › Research
Standard
Building Trust takes Time : Limits to Arbirage for Blockchain-Based Assets. / Voigt, Stefan; Hautsch, Nikolaus; Scheuch, Christoph.
Review of Finance, 2024.Research output: Working paper › Preprint › Research
Harvard
APA
Vancouver
Author
Bibtex
}
RIS
TY - UNPB
T1 - Building Trust takes Time
T2 - Limits to Arbirage for Blockchain-Based Assets
AU - Voigt, Stefan
AU - Hautsch, Nikolaus
AU - Scheuch, Christoph
PY - 2024
Y1 - 2024
N2 - Distributed ledger technologies replace central counterparties with time-consumingconsensus protocols to record the transfer of ownership. This settlement latencyslows down cross-market trading and exposes arbitrageurs to price risk. We theoreticallyderive arbitrage bounds induced by settlement latency. Using Bitcoin orderbook and network data, we estimate average arbitrage bounds of 121 basis points, explaining 91% of the cross-market price differences, and demonstrate that asset flows chase arbitrage opportunities. Controlling for inventory holdings as a measure of trust in exchanges does not affect our main results. Blockchain-based settlement without trusted intermediation thus introduces a non-trivial frictionthat impedes arbitrage activity.
AB - Distributed ledger technologies replace central counterparties with time-consumingconsensus protocols to record the transfer of ownership. This settlement latencyslows down cross-market trading and exposes arbitrageurs to price risk. We theoreticallyderive arbitrage bounds induced by settlement latency. Using Bitcoin orderbook and network data, we estimate average arbitrage bounds of 121 basis points, explaining 91% of the cross-market price differences, and demonstrate that asset flows chase arbitrage opportunities. Controlling for inventory holdings as a measure of trust in exchanges does not affect our main results. Blockchain-based settlement without trusted intermediation thus introduces a non-trivial frictionthat impedes arbitrage activity.
U2 - 10.2139/ssrn.3302159
DO - 10.2139/ssrn.3302159
M3 - Preprint
BT - Building Trust takes Time
PB - Review of Finance
ER -
ID: 336461371