Advanced Studies of Financial Technologies and Cryptocurrency Markets PDF
Preview Advanced Studies of Financial Technologies and Cryptocurrency Markets
Lukáš Pichl Cheoljun Eom Enrico Scalas Taisei Kaizoji Editors Advanced Studies of Financial Technologies and Cryptocurrency Markets Advanced Studies of Financial Technologies and Cryptocurrency Markets áš Luk Pichl Cheoljun Eom (cid:129) (cid:129) Enrico Scalas Taisei Kaizoji (cid:129) Editors Advanced Studies of Financial Technologies and Cryptocurrency Markets 123 Editors Lukáš Pichl(Deceased) CheoljunEom Department ofNatural Sciences Department ofBusiness Administration International Christian University PusanNational University Mitaka,Tokyo,Japan Busan, Korea (Republicof) EnricoScalas Taisei Kaizoji Department ofMathematics Department ofEconomics andBusiness University of Sussex International Christian University Brighton, UK Mitaka,Tokyo,Japan LukášPichlisDeceased ISBN978-981-15-4497-2 ISBN978-981-15-4498-9 (eBook) https://doi.org/10.1007/978-981-15-4498-9 ©SpringerNatureSingaporePteLtd.2020 Thisworkissubjecttocopyright.AllrightsarereservedbythePublisher,whetherthewholeorpart of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission orinformationstorageandretrieval,electronicadaptation,computersoftware,orbysimilarordissimilar methodologynowknownorhereafterdeveloped. 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The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore Contents Financial Innovations and Blockchain Applications: New Digital Paradigms in Global Cybersociety . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Lukáš Pichl, Cheoljun Eom, Enrico Scalas, and Taisei Kaizoji Financial Contagion through Asset Price and Interbank Networks . . . . 11 Jun Sakazaki and Naoki Makimoto Optimal Portfolios on Mean-Diversification Efficient Frontiers . . . . . . . 35 Adeola Oyenubi Time Series Prediction with LSTM Networks and Its Application to Equity Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Ken Matsumoto and Naoki Makimoto A Response Function of Merton Model and Kinetic Ising Model. . . . . . 89 Masato Hisakado and Takuya Kaneko Bitcoin’s Deviations from Satoshi’s World . . . . . . . . . . . . . . . . . . . . . . . 101 Naoyuki Iwashita Hodge Decomposition of Bitcoin Money Flow . . . . . . . . . . . . . . . . . . . . 117 Yoshi Fujiwara and Rubaiyat Islam Time Series Analysis of Relationships Among Crypto-asset Exchange Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 Takeshi Yoshihara, Tomoo Inoue, and Taisei Kaizoji The Optimal Foreign Exchange Futures Hedge on the Bitcoin Exchange Rate: An Application to the U.S. Dollar and the Euro. . . . . . 163 Zheng Nan and Taisei Kaizoji Time Series Analysis of Ether Cryptocurrency Prices: Efficiency, Predictability, and Arbitrage on Exchange Rates. . . . . . . . . . . . . . . . . . 183 Lukáš Pichl, Zheng Nan, and Taisei Kaizoji v vi Contents Estimating the Proportion of Informed Traders in BTC-USD Market Using Spread and Range . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197 Ping Chen Tsai and Shou Huang Dai Forecasting of Cryptocurrency Prices Using Machine Learning. . . . . . . 211 Vasily Derbentsev, Andriy Matviychuk, and Vladimir N. Soloviev Bitcoin and Its Offspring: A Volatility Risk Approach. . . . . . . . . . . . . . 233 Walter Bazán-Palomino Financial Innovations and Blockchain Applications: New Digital Paradigms in Global Cybersociety LukášPichl,CheoljunEom,EnricoScalas,andTaiseiKaizoji Abstract Cryptocurrencies—digital assets—are discussed from the viewpoint of themediumofexchange andthestoreofvaluewithafocusonBitcoin.Theissue oftrusttowardstheunitofaccountsisviewedintheperspectiveofhistoricalevents including fiat currency reforms in the past all over the world. It is argued that a major test of the present global financial system and its emerging new technology alternativeshasnotoccurredyet.Thenotionofintrinsicvalueofcurrencyisstrongly attached to the stability of the social and economic system, which landscape will be probably drastically altered in the next few decades due to the rise of artificial intelligence.Thechaptersinthisbookwhicharefocusingonthecurrentaspectsof financialinnovationsalsopointoutthepossibledirectionsanddilemmasthefuture maybringus. · · · · Keywords Money Cryptoasset Cryptocurrency Blockchain Currency · · · reform Financialcrisis Timeseriesprediction Machinelearning B L.Pichl( )·T.Kaizoji GraduateSchoolofArtsandSciences,InternationalChristianUniversity,Osawa3-10-2,Mitaka, Tokyo181-8585,Japan e-mail:[email protected] T.Kaizoji e-mail:[email protected] C.Eom SchoolofBusiness,PusanNationalUniversity,Busan46241,RepublicofKorea e-mail:[email protected] E.Scalas DepartmentofMathematics,SchoolofMathematicalandPhysicalSciences,Universityof Sussex,BrightonBN19QH,UK e-mail:[email protected] ©SpringerNatureSingaporePteLtd.2020 1 L.Pichletal.(eds.),AdvancedStudiesofFinancialTechnologies andCryptocurrencyMarkets,https://doi.org/10.1007/978-981-15-4498-9_1 2 L.Pichletal. 1 Introduction Theoriginsofnumeracy,theabilitytocountandworkwithnumbers,arehistorically documentedbyarcheologicalfindingsoftallysticks(Ifrah2000).Scientificprogress hasalwaystransformedthesociety—intheexampleofthetally,wherethenumber ofobjectsisrepresentedbythe(countof)notchesonthetallystick—notonlythe tallyservedasanumberrepresentationobject,itoftenhadthetransactionfunction ofbeingconvertibleinthecountedobject.Thishasbeenespeciallythecasewhen thetallywasendorsedbyahigh-rankingmemberofthesociety.Thematerialform ofmoney,asiswellknown,isthereforetightlyrelatedtothecurrentlevelofscience andtechnologyandgoeshandinhandwithtrust.Inourexampleofthetallystick moneyprecursor,itisthetrustthatatalaterpointoftimethetallycanbeconverted totheunderlyingobject(storeofvalue)orwouldbeacceptedasameansofpayment insteadofthephysicaldeliveryoftherepresentedgoods.Onefeatureofmoneythe individualtallystickdoesnotnecessarilyhaveishoweverthegeneralunitofaccounts property—theuniversalapplicationofthesamecountingunit,i.e.theemergenceof moneyinthemodernsenseofthewordasamediatorofalleconomictransactions (see,e.g.Weatherford1998). Therequirementformediatingalleconomictransactionscanbemetbyusinga highlymarketableasset,whichfirstnaturallyappearedintheformofgrainorlive- stock, before it was substituted with precious metals. The latter step would not be possiblewithoutsocialhierarchyinwhichtheobjectsofdesireweresetbytheupper classthatcontrolledthecommunityandtheuseofitstechnology.Aboutthreethou- sandyearsagoinChina,bronzemodelsreplicatingcowrieshellsappearedasmoney (Kerr2013).IntheIronAge,coinsmintedfrompreciousmetalsthatrepresentedthe notionofeconomicvalueappearedintheancientMediterraneanarea(Pavleketal. 2019),wheresystemofacommodity-based legaltenderhasprevailedthroughthe medievaltimes.Ourdiscussionthisfarwasbasedonthehistoryofnumeracyandits relationtomoney;however,numeracygoeshandinhandwithliteracy.Promissory notes to deliver money, based on trust and the legal system framework, have first been documented in China during the Han dynasty (von Klaproth 1823), and first precursors of paper money appeared as early as in the seventh century during the Tangdynasty(Pickering1844).Thisabstractionoffinancialvaluefromtheunder- lying value of coin metal asset decoupled the trust in the economic system from the asset value of the legal tender—money went even more abstract and modern currencieswereborn.Still,thepromissorynotefeatureofpapermoneybytheobli- gation to convert banknotes to gold on demand persisted in the world for quite a longtime—convertibilityofUSdollartogoldwasofficiallyterminatedbytheUS PresidentRichardNixonaslateasin1971(cf.ZoellerandBandelj2019).Instead, thenationalmotto“InGodWeTrust”ontheUSdollarbanknotesillustratesthetruth oftheincompletehumancontrolframeworkandtheuncertainfuturethathasbeena partofmoneynotionsinceitsinception. FinancialInnovationsandBlockchainApplications:NewDigital… 3 Whomisitthereforethatwetrustconsideringthestoreofvaluefunctionoffiat currencies? A mainstream answer would perhaps emphasize the role of the gov- ernmentandtheroleofthecentralbankineachcountry;intoday’sinterconnected world, a true cyberworld of computerized financial system, perhaps also a rising globalfinancialorder.Inthegoldstandardworld,itwastheBrettonWoodssystem at global scale; at present, various institutions influence the dynamics of the inter- twinedcompetingworldfinancialsystem,suchastheInternationalMonetaryFund, the World Bank, but also European Central Bank, Asian Infrastructure Investment Bank,andothers,basedontheregionandviewpoint. Whatdoesmoneymeantoday?HereisthequotationofPetrSýkora,co-founder ofthecharitablefoundationGoodAngelintheCzechRepublic(Petka2013): Moneytodayisjuststoredastheonesandzerosinacomputersystem.Itdoesnothaveto betheretomorrow… LetustakeCzechoslovakia asahistoricalexamplehowasuddencurrencyreform canruinpersonalsavings—thereisaninfamousquotationbyalocalspokesmanof communistpartyinthecityofPilsen(May29,1953)(Ule1965) Our currency is firm. Trust the party, Comrades. The rumors about a reform have no justification… followed the next day by the official public announcement of currency reform on May 30th, 1953, which largely deprived the population of cash and bank savings andresultedinlocalrebellionsagainsttheregime.Theconversionratesoftheold currencytothenewonevariedfrom1:5to1:50,basedontheamount;thegovernment alsorealizedabankruptcyastheobligationfromallgovernmentbondstotheirholders wascancelled. Since currency reforms feature nonlinear conversion between the old and new currencybasedonthedepositedamountleadingtoarbitraryrelocationoffinancial resources(KrishnaandLeukhina2019),theyarepopularwithtotalitarianregimes such as the one during the socialist regime period in Czechoslovakia. Similar loss of savings occurred in Russia during the currency reform of the summer 1993 which wiped out the value of savings of general population using a combination ofconversionrestrictionswithhighrateofinflation(cf.Desai2005). Theglobalfinancialcrisisof2008hasresultedintrilliondollarlossesalloverthe world,beitinthehousevalueandrelatedpersonalmortgagebankruptcieswhenthe US housing bubble burst; or the evaporated retirement savings of US citizens; the extreme losses of European Banks that naively propelled the sub-prime mortgage financialderivativeprices;inbriefthewholeworldsankintoanaftermath,arecovery fromwhichhasbeenparticularlylongandpainfulinEurope(cf.Farmer2012). Theabove-mentionedcurrencyreformsandfinancialcrisesserveusheretoclaim thattheprobabilityofmajordisruptioninthetimevalueoffiatcurrencies,evenif itweretobeonceinalifetime—isnotnegligible.Timesofhyperinflation,suchas thecurrentoneinVenezuela,attesttothelossofpublictrustintheofficialcurrency, andtheneedforanalternativesolution—beitaforeigncurrency,acommodity,or, aswediscussinthenextsection—perhapsevenacryptocurrency. 4 L.Pichletal. 2 AlgorithmicInnovationsinDigital Finance Money in the world moves to the cyberspace by getting digital form. The conse- quencesofsuchachangeincludedetailedexpenditureandrevenuetracesindatabases offinancialinstitutions,andtheshifttowardsthecashlesssociety,atrendespecially pronouncedinScandinaviancountriessuchasSweden,wherecardsandmobileapps insmartphonesarebyfarthemostcommonmeansofpayment.Proposalsforcitizen accountsdirectlywiththecentralbankarealsopopularasdiscussedinthefollowing. 2.1 FiatCurrencies—ProsandCons Whenafiatcurrencygoescompletelydigital,whichhasnotyetoccurredintheworld nevertheless, the central financial institution gains the technical means to cut each individualofftheeconomicsystem.Theyalsogainthefullfinancialrecordofindi- vidualbehavior.Informationhasbecomethemostvaluedcommodityofourtimes and its possession results in power. This asymmetric relation of an individual and the financial institution may be convenient when privacy is protected, and general securitymeasuresfunctionbutturnstoadisasterincasesofsuccessfulcyberattacks. Itisintheverynatureofthetrustedbookkeepingpartythatdigitalmoneycannotbe provedcompletelysecure.Technically,redistributionoffinancialwealthcaneasily beimplementedbyalteringthefinancialrecordsaccordingtoanyalgorithmdeemed aslegal,beitforinstance(nonlinear)negativeinterestratestofightdeflationinthe formofinstantaneous currency reformsusingcentralbankdigitalcurrency (Bind- seil2019).Asthesophisticationofthedigitalfinancialsystemsincreases,therisks associatedwiththemalfunctionofthecentralizedfinancialsystemgraduallydeepen. 2.2 Cryptocurrencies—ProsandCons The year 2008 is not only known for the Great Recession; it is the year when a breaking article entitled “Bitcoin: A Peer-to-Peer Electronic Cash System” pub- lishedunderthenameofSatoshiNakamotoappeared(Nakamoto2008).Thework solvedthedoublespendingproblemofdigitalmoney—howtoguaranteethatdigi- talmoneyisnotspentseveraltimes—bypublishingtheever-growingentirerecord ofalltransactionsprotectedbyencryptionintheformofblockchain.Accordingto Nakamoto,“Thenetworktimestampstransactionsbyhashingthemintoanongoing chainofhash-basedproof-of-work,formingarecordthatcannotbechangedwithout redoingtheproof-of-work”.Incentivetomaintainthecryptographicintegrityofthe blockchainisgivenbyrewardingthecreatorofthenewblockwithafixedamount of Bitcoin (mining process) or by using transaction fees. As long as the majority of the computational nodes participates in the blockchain consensus mechanism,
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