Desmarais Global Finance Research Centre (DGFRC) Seminar: Will Gornall
Will Gornall
University of British Columbia
How Short-Tenor Perpetual Futures Solved Crypt鈥檚
Noise Trader Problem
Date: Friday, September 13, 2024
Time: 10:30-11:45 am
Location: Bronfman Bldg. (1001 Sherbrooke St. West), Room 340
All are cordially invited to attend.
Abstract:
Most cryptocurrency trading uses perpetual futures contracts. We show empirically and theoretically that these contracts outcompeted standard futures by reducing noise trader risk. Standard futures contracts worked poorly in cryptocurrency markets because liquidations and price-insensitive speculators pushed futures prices far from their underlying's. Perpetual futures reduced this noise trader risk by strengthening arbitrage pressure using funding rate payments. This form of contract quickly dominated the crypto market, increased liquidity, and caused noise trader risk to become non-priced. We argue that this mechanism of relaxing limits to arbitrage could reduce tail-risk for conventional futures products subject to volatile, price-insensitive demand shocks.
