Essays on the new financial landscape

Thesis

This dissertation consists of three essays, each examining the implications of a major change to the financial landscape over the past decade.

In the first essay, I show that price formation for cryptocurrencies is markedly different from that for other asset classes. I study two distinctive characteristics of cryptocurrencies. First, the blockchain structure of cryptocurrency means that there is a limit on the number of transactions that can be settled in any given time. Second, as a cryptocurrency is a form of money not backed by any asset class, its value depends on the extent to which it is used as a means of payment. Taken together, these characteristics mean that speculative activity can crowd out payment usage. Trading can lower the price of the asset, even when it is buy-side trading. I show that this may explain high price volatility.

In the second essay, we propose a novel channel for credit crunches. A borrower fears that there will be distress in the financial sector, in which case her relationship lender may not be able to finance her project. To insure against this risk, she chooses a smaller project that uninformed outsiders would be willing to finance. Financial distress therefore leads to lower investment, but not via the usual supply or demand side channels. We show that a small increase in distress risk can lead to a large downward jump in investment. This is joint work with Alan Morrison and Joel Shapiro.

Finally, the third essay examines how derivatives trading networks are affected by the introduction of mandatory central clearing. There can be a trade-off: central clearing can increase the mean of net exposures, but reduce the variance. We show that the trade-off can never be in the other direction. This suggests that, the more risk-averse agents are, the beneficial central clearing is likely to be. This is joint work with Rodney Garratt.

Authors: Zimmerman, P

• DOI: 10.5287/ora-2azo0qnag
• Type of award: DPhil
• Level of award: Doctoral
• Awarding institution: University of Oxford
• Language: English
• Keywords: cryptocurrency; CCP; global games; blockchain; networks; credit crunch; relationship lending