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Essays on FinTech and financial markets

Tang, Bo (2022) Essays on FinTech and financial markets. PhD thesis, London School of Economics and Political Science.

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Identification Number: 10.21953/lse.00004562


This thesis contains three essays on FinTech and financial markets. In the first chapter, I study the business models of cryptocurrency exchanges and their implications for token performance and the cryptocurrency exchange industry dynamics. As the most powerful financial intermediaries in cryptocurrency markets, cryptocurrency exchanges play the dual roles of traditional exchanges and underwriters. Based on two novel measures that capture the hidden heterogeneity of cryptocurrency exchanges, I show that 1) tokens listed in exchanges with large trading revenues perform better, and 2) exchange characteristics predict token returns, with stronger effects for exchanges with large trading revenues. A stylized reputation model shows how the interaction between trading and listing explains differences in token performance. I also argue that first-mover advantages lead to a natural concentration in the cryptocurrency exchange industry. In the second chapter (co-authored with Yang You), we find that Bitcoin trading is more active in countries where people express more distrust in others. The paper argues that distrust serves as a fundamental for cryptocurrency valuation by exploring price differences in panel data. We proxy for Bitcoin demand with transitory price deviations— Bitcoin prices in a local currency, converted into dollars, relative to the average worldwide dollar Bitcoin prices. A simple portfolio choice model generates several predictions that we test empirically. Price deviations rise when 1) perceptions of institutional failures grow, 2) crypto-trading frictions increase, and 3) cryptocurrency prices rally. Consistent with the model’s predictions, distrust explains price response heterogeneity: investors in low-trust countries demand more Bitcoins and drive up its price relative to the world dollar price when local institutional quality deteriorates, arbitrage frictions intensify, and risk appetite rises. In the third chapter, I construct a measure which captures the evolution of market beliefs based on option data. By tracking market belief updates over time, I find evidence of excess volatility in expected returns in one-month investment horizons. The evidence is inconsistent with expected returns being a martingale. I find no evidence of excess volatility in six-month investment horizons. Based on the dynamics of market beliefs, I measure uncertainty as the time-series volatility of expected returns. I show evidence of an uncertainty premium.

Item Type: Thesis (PhD)
Additional Information: © 2022 Bo Tang
Library of Congress subject classification: H Social Sciences > HG Finance
Sets: Departments > Finance
Supervisor: Ferreira, Daniel

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