Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/190979 
Year of Publication: 
2018
Series/Report no.: 
CFS Working Paper Series No. 616
Publisher: 
Goethe University Frankfurt, Center for Financial Studies (CFS), Frankfurt a. M.
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.
Subjects: 
Arbitrage
Settlement Latency
Distributed Ledger
Blockchain
JEL: 
G00
G10
G14
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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