Speed of adjustment in digital assets in a decentralised financial world

Abstract

Digital assets, such as cryptocurrencies, are innately volatile. An asset manager would, however, require these assets to be long-term stable, expecting that the impact of a shock, of varying magnitudes, would dissipate fast, leaving little time for another shock to have any sort of complex interaction with the previous one. We term this pathway to stability of digital assets as the speed of adjustments. In this paper, we argue and show that the faster the shocks dissipate, the faster the digital assets become stable and productive. Our empirical mechanics exploits a dynamic estimation of Fractionally Cointegrated VAR, which allows for a simultaneous interplay of slow convergence of shocks and non-linear interaction of shocks within the dynamic digital assets system. We show that as the adjustment speed improves, the productivity of digital assets improves as well, encouraging investors to avoid assuming that large assets always play influential roles in spillover.

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Identifiers

ORCID for Jeremy Eng-Tuck Cheah: orcid.org/0000-0003-2953-3815

ORCID for Tapas Mishra: orcid.org/0000-0002-6902-2326

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