Measuring DeFi Price Impact and A New Empirical Market Microstructure Model
The paper analyzes decentralized exchange price impact using VAR models, distinguishing MEV and non-MEV trades across Ethereum and XRP data.
What it examines
This paper proposes an augmented VAR model that includes an indicator for arbitrage (MEV) traders to study price discovery on decentralized exchanges. It uses blockchain trade data to overcome limitations of traditional VAR models with many zeros, aiming to accurately capture differential price impact by trader type.
What it concludes
The results show MEV traders create significantly greater volatility and permanent price impact on DEX markets. These findings can improve market monitoring, guide regulatory decisions, and inform algorithmic trading strategies. Future research may expand applications to other digital asset markets and enhance decentralized finance tools.
Evidence objects
Researchers introduce an augmented VAR model distinguishing MEV arbitrage from non-MEV traders, revealing that MEV trading delivers larger, more lasting price discovery impacts compared to regular trades on decentralized exchanges.
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Traditional VAR models underestimate arbitrage trades due to numerous zero observations, a gap filled by integrating trader type information, refining methods and revealing price impact differences in decentralized market trading.
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Empirical analysis uses granular, trade-by-trade data from Ethereum and XRP ledgers and Monte Carlo simulations to expose biases in conventional methods, highlighting uncertainties and challenges for generalizing findings across markets.
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This paper introduces an innovative augmented VAR model distinguishing trader types, revolutionizing price discovery analysis in decentralized finance. Its novel approach expertly tackles zero observations in arbitrage trades, offering valuable insights into digital asset markets and market microstructure. This pioneering methodology enriches quantitative finance research and underlines DeFis dynamic complexity.
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Raw abstract and provenance
- … This paper examines the price discovery process in a DeFi marketplace using a new econometric model carefully designed to suit the specific characteristics of trading …
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