Reaching for Yield in Decentralized Financial Markets

93 Pages Posted: 25 Apr 2022 Last revised: 27 Mar 2024

See all articles by Patrick Augustin

Patrick Augustin

McGill University; McGill University, Desautels Faculty of Management

Roy Chen-Zhang

University of North Carolina at Chapel Hill, Kenan-Flagler Business School

Donghwa Shin

University of North Carolina at Chapel Hill, Kenan-Flagler Business School

Date Written: March 21, 2022

Abstract

Yield farms in decentralized finance dynamically compete for liquidity by offering high yields, advertised as salient headline rates. Farming these yields involves complex investment strategies with hidden downside risks. Capitalizing on the transparency of blockchain transactions data, we show that investors chase farms with high yields and that farms with the highest headline rates record the most negative risk-adjusted returns. Through randomized shocks to yield farmers' information display, we show that improved risk disclosure and lower perceived product complexity reduces yield chasing, thereby improving investor performance. Our evidence is consistent with salience theory that may underpin reaching for yield behavior.

Keywords: complexity, decentralized finance, derivatives, reaching for yield, salience

JEL Classification: G12, G13, G14, O33, Y80

Suggested Citation

Augustin, Patrick and Augustin, Patrick and Chen-Zhang, Roy and Shin, Donghwa, Reaching for Yield in Decentralized Financial Markets (March 21, 2022). LawFin Working Paper No. 39, Proceedings of the EUROFIDAI-ESSEC Paris December Finance Meeting 2023, Available at SSRN: https://ssrn.com/abstract=4063228 or http://dx.doi.org/10.2139/ssrn.4063228

Patrick Augustin

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

HOME PAGE: http://https://patrickaugustin.ca/

McGill University, Desautels Faculty of Management ( email )

1001 Sherbrooke Street West
Quebec
Montreal, Quebec H3A 1G5
Canada

HOME PAGE: http://www.patrickaugustin.se

Roy Chen-Zhang

University of North Carolina at Chapel Hill, Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

HOME PAGE: http://www.roychenzhang.com/

Donghwa Shin (Contact Author)

University of North Carolina at Chapel Hill, Kenan-Flagler Business School ( email )

300 Kenan Center Drive
Chapel Hill, NC 27599
United States
6096137699 (Phone)

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