Distributed ledger technologies rely on consensus protocols confronting traders with random waiting times until the transfer of ownership is accomplished. This timeconsuming settlement process exposes arbitrageurs to price risk and imposes limits to arbitrage. We derive theoretical arbitrage boundaries under general assumptions and show that they increase with expected latency, latency uncertainty, spot volatility, and risk aversion. Using high-frequency data from the Bitcoin network, we estimate arbitrage boundaries due to settlement latency of on average 124 basis points, covering 88% of the observed cross-exchange price differences. Settlement through decentralized systems thus induces non-trivial frictions affecting market efficiency and price formation.
We study the spending response of first-time borrowers to an overdraft facility and elicit their preferences, beliefs, and motives through a FinTech application. Users increase their spending permanently, lower their savings rate, and reallocate spending from non-discretionary to discretionary goods. Interestingly, liquid users react more than others but do not tap into negative deposits. The credit line acts as a form of insurance. These results are not fully consistent with models of financial constraints, buffer stock models, or present-bias preferences. We label this channel perceived precautionary savings motives: Liquid users behave as if they faced strong precautionary savings motives even though no observables, including elicited preferences and beliefs, suggest they should.
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