Essays in Financial Innovation and FinTech

Abstract

In my thesis, Essays in Financial Innovation and FinTech, I investigate two growing innovative asset classes, structured retail products (SRPs) and cryptocurrencies.

Chapter 1 examines the market for SRPs. This market has grown rapidly in sales volume and complexity in last two decades. Using a comprehensive dataset on SRPs, I examine investors extrapolation as an explanation of this phenomenon. I find that products with higher past returns have enjoyed higher sales growth, even though past returns do not predict future performance. This effect is stronger for more complex products, leading to the observation of greater popularity of more complex products that happen to deliver better past performance. While there is some evidence of financial intermediaries exploiting investors in early part of the sample, my results further suggest that the rapid market growth induced by extrapolation has led to more competition among intermediaries, which in turn disciplines exploitation.

In Chapter 2, my coauthors and I study Initial Coin Offerings (ICOs). Certification by a crowd of online analysts and early investors can generate excitement among potential token investors, leading to successful ICOs. We test "wisdom of crowds" using novel data on over 1,500 ICOs, including sequential investor subscriptions during token sales. We find that favorable analyst opinions on the underlying project are associated with aggressive initial token subscriptions, which predicts subsequent token sales. Overall, our results suggest that the wisdom of crowds could mitigate information asymmetry in the ICO market.

In Chapter 3, my coauthors and I study pervasive market manipulation activities, Pump-and-dump schemes (P&Ds) in the cryptocurrency market. We study these events using trade-by-trade data and a sample of P&Ds with precisely identified starting time. We find that P&Ds lead to short-term cryptocurrency bubbles featuring dramatic increases in prices, volume and volatility. Prices reach the peak in one minute and a quick reversal follows. Evidence, including a significant price run-up before the start of P&Ds, implies significant wealth transfers from insiders to outsiders. Bittrex, a cryptocurrency exchange, banned P&Ds on November 24, 2017. Using a difference-in-differences, we provide causal evidence that P&Ds are detrimental to the liquidity and price of cryptocurrencies.