ICEF/LFE Research Seminar by Igor Makarov (London School of Economics)

On Tuesday, May 22 ICEF and Laboratory of Financial Economics (LFE) held the Research Seminar in Finance.

Speaker: Professor Igor Makarov (London School of Economics), LFE invited researcher
Theme: "Trading and Arbitrage in Cryptocurrency Markets"

Abstract: This paper studies the efficiency and price formation of bitcoin and other cryptocurrency markets. First, there are large recurrent arbitrage opportunities in bitcoin prices relative to fiat currencies across exchanges that often persist for several days or weeks. These price dispersions exist even in the face of significant trading volumes on many of the exchanges. The total size of arbitrage profits just from December 2017 to February 2018 is above of $1 billion. Second, arbitrage opportunities are much larger across than within the same region; they are particularly large between the US, Japan and Korea, but smaller between the US and Europe. The arbitrage spreads are much smaller between cryptocurrency pairs across exchanges, suggesting that capital controls on fiat currencies play an important role. Finally, we decompose signed volume on each exchange into a common component and an idiosyncratic, exchange-specific component. We show that the common component explains 80 percent of the variation in bitcoin returns and that the idiosyncratic components of order flow play an important role in explaining the size of the arbitrage spreads between exchanges.