Market Inefficiency in Cryptoasset Markets

TL;DR

This paper provides evidence of market inefficiency in cryptoasset markets by showing that equilibrium restrictions are violated, indicating the presence of frictions that hinder proper capital reallocation beyond mispricing.

Contribution

It introduces a novel approach to test market efficiency by analyzing investments with shared dominant risks but differing secondary risks, deriving equilibrium restrictions for validation.

Findings

Empirical rejection of equilibrium restrictions in crypto markets

Evidence of market frictions impeding capital reallocation

Market inefficiency not explained by risk mispricing

Abstract

We demonstrate market inefficiency in cryptoasset markets. Our approach examines investments that share a dominant risk factor but differ in their exposure to a secondary risk. We derive equilibrium restrictions that must hold regardless of how investors price either risk. Our empirical results strongly reject these necessary equilibrium restrictions. The rejection implies market inefficiency that cannot be attributed to mispriced risk, suggesting the presence of frictions that impede capital reallocation.