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Model-based arbitrage in multi-exchange models for Bitcoin price dynamics

Author

Listed:
  • Stefano Bistarelli

    (University of Perugia)

  • Alessandra Cretarola

    (University of Perugia)

  • Gianna Figà-Talamanca

    () (University of Perugia)

  • Marco Patacca

    (University of Perugia
    Léonard de Vinci Pôle Universitaire, Research Center)

Abstract

Abstract Bitcoin is a digital currency started in early 2009 by its inventor under the pseudonym of Satoshi Nakamoto. In the last few years, Bitcoin has received much attention and has shown a surprising price increase. Bitcoin is currently traded on many web-exchanges making it a rare example of a good for which different prices are readily available; this feature implies important issues about arbitrage opportunities since prices on different exchanges are shown to be driven by the same risk factor. In this paper, we show that simple strategies of strong arbitrage arise by trading across different Bitcoin exchanges taking advantage of the common risk factor. The suggested arbitrage strategies are based on two alternative model specifications. Precisely, we consider the multivariate versions of Black and Scholes model and of an attention-based dynamics recently introduced in the literature.

Suggested Citation

  • Stefano Bistarelli & Alessandra Cretarola & Gianna Figà-Talamanca & Marco Patacca, 2019. "Model-based arbitrage in multi-exchange models for Bitcoin price dynamics," Digital Finance, Springer, vol. 1(1), pages 23-46, November.
  • Handle: RePEc:spr:digfin:v:1:y:2019:i:1:d:10.1007_s42521-019-00001-2
    DOI: 10.1007/s42521-019-00001-2
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    Keywords

    Bitcoin; Arbitrage; Sharpe ratio;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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