Price dynamics of cryptocurrencies in parallel markets: evidence from Bitcoin exchanges in Brazil
Studies in Economics and Finance
ISSN: 1086-7376
Article publication date: 12 August 2021
Issue publication date: 18 October 2021
Abstract
Purpose
This paper aims to study the dynamics of bitcoin prices in Brazil, a large emerging economy with an unregulated bitcoin market.
Design/methodology/approach
First, this study tests if the Law of One Price (LOOP) is valid for bitcoin prices in Brazil, conducting tests with data from three Brazilian exchanges. Next, this study documents bitcoin price dynamics in the short run by studying the price discovery mechanism in these exchanges. This study uses Information Share and Component Share, combining the two measures to obtain an Information Leadership Share (ILS) measure.
Findings
This study finds a common trend within bitcoin prices among a set of exchanges, with cointegration tests between the price series indicating that LOOP is valid in Brazilian markets in the long run. ILS indicated that, for closing prices, the most liquid exchange (Foxbit) leads discovery, whereas the least liquid (Local Bitcoin) lags, with Mercado Bitcoin in the middle both in terms of discovery and liquidity. Finally, this study provides evidence that the price variation in the market that leads price discovery can be used to construct an arbitrage in another exchange.
Originality/value
This research brings the first evidence of a price discovery mechanism for exchanges in Brazilian Reais. Although LOOP is valid in the long run, price leadership in bitcoin markets potentially create arbitrage opportunities in the short run. This study contributes to the growing literature of bitcoin prices with novel evidence from a large emerging economy.
Keywords
Acknowledgements
We thank three anonymous referees, Jefferson Bertolai, Jefferson Colombo, Bruno Frascaroli, Fabio Gomes, and participants of the 47th Brazilian National Meeting of Economics (ANPEC) and XIX Brazilian Finance Meeting (SBFin) for helpful comments. The remaining errors are our own. Previously circulated as Bitcoin in Brazil: Law of One Price and Price Discovery in an Emerging Market.
Citation
Andrade, D.M.d., Barros Jr, F., Motoki, F.Y. and Oliveira da Silva, M. (2021), "Price dynamics of cryptocurrencies in parallel markets: evidence from Bitcoin exchanges in Brazil", Studies in Economics and Finance, Vol. 38 No. 5, pp. 1040-1053. https://doi.org/10.1108/SEF-11-2020-0450
Publisher
:Emerald Publishing Limited
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