Essays In Financial Markets
Date
2019-12-13
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Abstract
In the first paper of this thesis we model bargaining with a sovereign subject to a moral hazard problem. The country can implement a better economic policy which will increase its future revenues, but doing so comes at a personal cost to the sovereign. The lender can only observe imperfect signals of the country's policy choice and set debt forgiveness and the number of signals required indicating that the country has implemented the good policy. With imperfect signals, welfare reducing bargaining delay may occur. In some cases both lender payoff and total welfare may improve with less precise signals. We offer an explanation why sovereign debt restructuring, such as in the recent case of Greece, can take a long time and why lenders have to collect information on the country's progress during renegotiations. The European debt crisis made clear the negative effects that can arise from the separation of monetary and fiscal policy. A parallel currency could potentially provide some liquidity at least in the short term. The rise in prominence of cryptocurrencies may indicate a future willingness of the public to adopt alternative currencies. The second paper examines price differences in Bitcoin across different markets. Between January 2016 and February 2018, Bitcoin were in Korea on average 4.73% more expensive than in the United States, a fact commonly referred to as the Kimchi premium. We argue that capital controls create frictions as well as amplify existing frictions from the microstructure of the Bitcoin network that limit the ability of arbitrageurs to take advantage of persistent price differences. We find that the Bitcoin premia are positively related to transaction costs, confirmation time in the blockchain, and to Bitcoin price volatility in line with the idea that the delay and the associated price risk during the transaction period make trades less attractive for risk averse arbitrageurs and hence allow prices to diverge. A cross country comparison shows that Bitcoin tend to trade at higher prices in countries with lower financial freedom. Finally unlike the prediction from the stock bubble literature, the Kimchi premium is negatively related to the trading volume, which also suggests that the Bitcoin microstructure is important to understand the Kimchi premium.
Description
Keywords
cryptocurrencies, fintech, bargaining, sovereign debt, parallel currencies
Citation
Stauffer, R. (2019). Essays In Financial Markets (Doctoral thesis, University of Calgary, Calgary, Canada). Retrieved from https://prism.ucalgary.ca.