Limits to Arbitrage in Markets with Stochastic Settlement Latency
Nikolaus Hautsch (),
Christoph Scheuch and
Papers from arXiv.org
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 percent of the observed cross-exchange price differences. Settlement through decentralized systems thus induces non-trivial frictions affecting market efficiency and price formation.
New Economics Papers: this item is included in nep-mst and nep-pay
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
http://arxiv.org/pdf/1812.00595 Latest version (application/pdf)
Working Paper: Limits to arbitrage in markets with stochastic settlement latency (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1812.00595
Access Statistics for this paper
More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().