Market Inefficiency in Cryptoasset Markets

Paper: arXiv 2602.20771

Authors: Joel Hasbrouck, Julian Ma, Fahad Saleh, Caspar Schwarz-Schilling

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.

Complexity vs Empirical Score

• Math Complexity: 6.5/10
• Empirical Rigor: 8.5/10
• Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper provides a rigorous theoretical model deriving model-free equilibrium restrictions across Ethereum yields and tests them empirically with high precision. By demonstrating that yield co-movements strongly reject equilibrium conditions regardless of risk pricing, it provides compelling proof of market inefficiency in DeFi.

Research Flowchart

  flowchart TD
    A["Research Goal: Test Market Efficiency in Cryptoasset Markets"] --> B["Select Investments Sharing Dominant Risk<br/>(Diverging on Secondary Risk)"]
    B --> C["Derive Universal Equilibrium Restrictions<br/>(Independent of Risk Pricing Model)"]
    C --> D["Empirical Analysis of Crypto Market Data"]
    D --> E{"Do Empirical Results<br/>Satisfy Restrictions?"}
    E -- "No (Strong Rejection)" --> F["Outcome: Confirm Market Inefficiency"]
    F --> G["Key Finding: Capital Reallocation Frictions<br/>(Not Due to Mispriced Risk)"]

Cited References (109)

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8. Empirical market microstructure: The institutions, economics, and econometrics of securities trading (2007)

1 of 109 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.