Interest Rate Parity in Decentralized Finance

55 Pages Posted: 4 May 2023

See all articles by Amit Chaudhary

Amit Chaudhary

University of Warwick - Department of Economics

Roman Kozhan

University of Warwick - Warwick Business School

Ganesh Viswanath-Natraj

Warwick Business School

Date Written: May 4, 2023

Abstract

This paper studies determinants of interest rates on Decentralized lending protocols. Using transaction level data, we show these protocols are being used to make long or short leveraged positions in the cryptocurrency market. We identify a significant relationship between the interest rate differential and the perpetual futures premium for the ETH/USDT market. However, the link is economically weak, indicating that the speculative beliefs in the two markets are only weakly correlated and that the markets are segmented. Arbitrage across the two markets is ineffective due to wide no-arbitrage bounds, which are governed by high trading costs, gas fees, and price impacts.

Keywords: Cryptocurrency, decentralized finance, lending protocols, perpetual futures, arbitrage.

JEL Classification: F31, G14, G15, G18, G23

Suggested Citation

Chaudhary, Amit and Kozhan, Roman and Viswanath-Natraj, Ganesh, Interest Rate Parity in Decentralized Finance (May 4, 2023). WBS Finance Group Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=4437706 or http://dx.doi.org/10.2139/ssrn.4437706

Amit Chaudhary

University of Warwick - Department of Economics ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom

Roman Kozhan

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Ganesh Viswanath-Natraj (Contact Author)

Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom
CV4 7AL (Fax)

HOME PAGE: http://https://ganeshvnatraj.netlify.com

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