Existence, Pricing Kernel & Risk Premium of Cryptocurrencies

UNIVERSITY OF TECHNOLOGY SYDNEY
Finance Department
Research Seminars in Finance

Cathy Yi-Hsuan Chen

Topic: Coins With Benefits: On Existence, Pricing Kernel and Risk Premium of Cryptocurrencies

Speaker: Cathy Yi-Hsuan Chen, University of Glasgow

Abstract: Cryptocurrencies come with benefits, such as anonymity of payments and positive network effects of user adoption, and transaction risks, such as unconfirmed transfers, hacks, and frauds. They compete with central-bank-regulated currencies as a means of payment but this competition is not perfect: consumers are not indifferent with respect to the currency to be used in transactions. In our arbitrage-free world consumers' utility from consumption depends on benefits offered by the type of the currency: for example, preserving anonymity may increase utility, while fraud would decrease it. Distinct stochastic processes governing benefits of the two currencies generate incomplete markets with crypto- and central bank currencies operating under distinct pricing kernels. We characterize the bitcoin kernel and its relationship with the pricing kernel in the centralized market. Our model allows us to evaluate the otherwise unobservable benefits and their contribution to the pricing kernel. The model explains both the co-existence of decentralized and centralized currencies and the risk and return patterns in the cryptocurrency world.

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Moderator: Vitali Alexeev, University of Technology Sydney

Date: Wednesday, 1st September 2021
Time: 5-6 pm (Australian Eastern Standard Time)
Venue: This is on online Zoom webinar.

Seminar protocols:

  • The webinar will run for 45 minutes, followed by a 15 minute Q&A session.
  • There will be a moderator for each seminar event, who will facilitate communication and resolve any technical issues.
  • Participants can use the chat facility or raise their had to ask questions during the presentation. The moderator will then alert the speaker at the appropriate time and either ask the questions raised or unmute the participant so they can ask the question directly to the presenter.

Co-ordinator: Harry Scheule

Enquiries: Duncan Ford

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