Paper: arXiv 2302.10252

Authors: Antzelos Kyriazis, Iason Ofeidis, Georgios Palaiokrassas, Leandros Tassiulas

Abstract

This paper studies the effects of unexpected changes in US monetary policy on digital asset returns. We use event study regressions and find that monetary policy surprises negatively affect BTC and ETH, the two largest digital assets, but do not significantly affect the rest of the market. Second, we use high-frequency price data to examine the effect of the FOMC statements release and Minutes release on the prices of the assets with the higher collateral usage on the Ethereum Blockchain Decentralized Finance (DeFi) ecosystem. The FOMC statement release strongly affects the volatility of digital asset returns, while the effect of the Minutes release is weaker. The volatility effect strengthened after December 2021, when the Federal Reserve changed its policy to fight inflation. We also show that some borrowing interest rates in the Ethereum DeFi ecosystem are affected positively by unexpected changes in monetary policy. In contrast, the debt outstanding and the total value locked are negatively affected. Finally, we utilize a local Ethereum Blockchain node to record the activity history of primary DeFi functions, such as depositing, borrowing, and liquidating, and study how these are influenced by the FOMC announcements over time.

Complexity vs Empirical Score

  • Math Complexity: 3.5/10
  • Empirical Rigor: 7.5/10
  • Quadrant: Street Traders — practical and empirical, lighter on theory

Why this score: The paper relies primarily on empirical high-frequency event study regressions rather than complex mathematical modeling. It offers strong novelty by leveraging a local Ethereum node to measure the granular impact of US monetary policy surprises on DeFi protocols, liquidations, and TVL.

Research Flowchart

  flowchart TD
    A[Goal: Effect of US Monetary Policy on Digital Assets & DeFi] --> B[Data: FOMC Releases, HF Crypto Prices, Ethereum Node Records]
    B --> C[Event Study Regressions & HF Volatility Analysis]
    B --> D[Reconstruct On-Chain DeFi History via Local Ethereum Node]
    C --> E[Findings: Policy Surprises Negatively Impact BTC & ETH Returns]
    C --> F[Findings: FOMC Statements Spike Volatility, Escalating Post-Dec 2021]
    D --> G[Findings: Surprises Raise DeFi Borrowing Rates, Reduce TVL & Liquidity]