Challenges and opportunities in digital financial markets: risk and return
By Patrick Augustin
Associate Professor of Finance at the Desautels Faculty of Management, McGill University, Canada, Research Chair in Macrofinance and Derivatives
With a high-level panel of leaders from science, technology, field action and policy
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The digital economy has led to a significant transformation of the financial sector. The research presented in this webinar focuses on the risk and return characteristics of yield farming investment strategies on PancakeSwap, one of the largest automated market makers in the emerging decentralized financial services ecosystem. PancakeSwap offers various ways to earn passive income by staking pairs of cryptocurrency tokens in liquidity pools and harvesting governance tokens in yield farms. This practice, also called yield farming, generates performance through various components related to capital gains, trading fee income, and agricultural income. However, it is subject to temporary losses, which are determined non-linearly by the different return trends of the underlying cryptocurrency token pairs. Research shows that yield farming offers positive Sharpe ratios comparable to other cryptocurrency investments and the S&P500 index. However, once transaction costs and price impacts are taken into account, investment performance decreases significantly, which is particularly important for businesses with the highest total returns. This can lead to negative risk-adjusted returns. In addition, it has been found that investors in high-yield operations tend to focus on past performance and high returns, leading to negative future returns. These patterns are similar to the investment behavior and risk-return characteristics observed in traditional markets despite the absence of financial intermediaries. Because yield farming is easily accessible to retail investors, this analysis has important implications for the current debate over the regulation of decentralized financial services. A panel discussion will follow to further explore real-world solutions.
About the speaker
Patrick Augustine holds the Canada Research Chair in Macrofinance and Derivatives and is an Associate Professor of Finance at the Desautels Faculty of Management at McGill University. He is also an Associate Fellow at the Canadian Derivatives Institute and a recipient of the 2022 Bank of Canada Governor's Award. He holds a doctorate in finance from the Stockholm School of Economics and has held visiting research positions at New York University's Stern School of Business, the Los Angeles Anderson School of Management from the University of California, the Stockholm School of Economics, the University of Sydney, and the Luxembourg School of Finance. He is certified as a Financial Risk Manager by the Global Association of Risk Professionals and was a fellow at the World Economic Forum's Global Future Councils. Before joining academia, he worked as a structured credit officer at Dexia and as an attaché at the Luxembourg Ministry of Foreign Affairs. Patrick's research interests lie at the intersection of macroeconomics and financial markets with a focus on sovereign credit risk, corporate fundamentals and credit risk with a focus on credit derivatives, and law and finance with a focus on insider trading. Most recently he was interested in the emergence of digital financial securities. His work has been published in Journal of Finance, Review of Financial Studies, Journal of Financial Economics, Journal of Monetary Economics, Management Science, and Journal of Financial and Quantitative Analysis, among others. His work has been widely reported in the financial press, including The New York Times, The Wall Street Journal, The Washington Post, Fortune, and The Globe and Mail.
About the series
The Precision convergence series is launched to catalyze a unique synergy between, on the one hand, novel partnerships between sciences, sectors and jurisdictions around targeted areas of real-world solutions and, on the other hand, a convergence of the next generation of AI with advanced research informatics and other data digital architectures such as PSCs Bridges-2 and supporting data exchange frameworks such as HuBMAP that provide as real-time as possible information about the design, deployment and monitoring of adaptive behavior solutions and real-world context.
The Precision Convergence Webinar Series is co-hosted by the McGill Center for the Convergence of Health and Economics (MCCHE) at McGill University and the Pittsburgh Supercomputing Center, a joint computing research center between Carnegie Mellon University and the University of Pittsburgh.
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