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  5. Asset Pricing: Cryptoassets
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Asset Pricing: Cryptoassets

Paper Session

Sunday, Jan. 7, 2024 1:00 PM - 3:00 PM (CST)

Marriott Rivercenter, Grand Ballroom Salon A
Hosted By: American Finance Association
  • Chair: Catherine Casamatta, Toulouse School of Management

The End of the Crypto-Diversification Myth

Antoine Didisheim
,
University of Lausanne and Swiss Finance Institute
Martina Fraschini
,
University of Luxembourg
Luciano Somoza
,
ESSEC Business School

Abstract

Cryptocurrencies and equities have exhibited a high and positive correlation since March 2020. Without obvious fundamental drivers, we show theoretically that trading flows by retail investors can drive this correlation. With a unique dataset of investor-level holdings from a bank offering trading accounts and cryptocurrency wallets, we show that retail investors tend to trade equities and cryptocurrencies simultaneously in the same direction and that this behavior emerged in March 2020. We provide suggestive evidence showing that stocks preferred by crypto-traders exhibit a stronger correlation with Bitcoin, especially when the cross-asset retail volume is high.

The Need for Fees at a DEX: How Increases in Fees Can Increase DEX Trading Volume

Joel Hasbrouck
,
New York University
Thomas Rivera
,
McGill University
Fahad Saleh
,
Wake Forest University

Abstract

We model endogenous trading and liquidity provision at a decentralized exchange (DEX) and demonstrate that increasing DEX trading fees can increase DEX trading volume. DEXs employ a mechanical pricing rule whereby price impacts decrease with inventory which DEXs acquire only by offering fee revenues to investors. Consequently, higher DEX fees can incentivize higher inventory, thereby reducing price impacts. Moreover, the price impact reduction can offset the fee increase so that the trading costs for marginal DEX traders decline despite paying higher trading fees. In turn, lower trading costs drive trading activity to the DEX, generating an increase in trading volume.

Trust in DeFi: An Empirical Study of the Decentralized Exchange

Jianlei Han
,
Macquarie University
Shiyang Huang
,
University of Hong Kong
Zhuo Zhong
,
University of Melbourne

Abstract

We empirically study the role of the decentralized cryptocurrency exchange (DEX) in guiding cryptocurrency trading. Investors trust the DEX: DEX’s userbase information affects investor trading on the centralized cryptocurrency exchange (CEX). This effect intensifies during instances of market manipulation––“wash trading”—on the CEX or when investors have more concerns about it. Conversely, CEX’s userbase doesn’t reciprocally impact CEX trading. Using the “yield-farming” program launch as quasi-exogenous shocks, we confirm DEX’s causal impact on CEX trading. Our study highlights that the DEX can foster efficient, transparent trading structures where trustworthy centralized mechanisms are impractical or costly.

Price Discovery on Decentralized Exchanges

Agostino Capponi
,
Columbia University
Ruizhe Jia
,
Columbia University
Shihao Yu
,
Columbia University

Abstract

In contrast to centralized exchanges, decentralized exchanges (DEXs) process orders in discrete time and require traders to bid a priority fee to determine the execution priority. We employ a structural vector-autoregressive model to provide evidence that the priority fee reveals the private information of a DEX trade, contributing to price discovery. A one-standard deviation shock in the high-fee DEX trade flow leads to a permanent price impact between 4.27 and 8.16 basis points. We show that informed traders bid high fees not only to reduce execution risk but also to compete with each other. Using a unique dataset of Ethereum mempool orders, we lend support to the hypothesis that informed traders primarily compete on DEXs following a jump-bidding strategy.

Discussant(s)
Julia Reynolds
,
Securities and Exchange Commission
Marius Zoican
,
University of Toronto
Olga Klein
,
University of Warwick
Chen Yao
,
Chinese University of Hong Kong
JEL Classifications
  • G1 - General Financial Markets