MCCHE Precision Convergence Webinar Series with Patrick Augustin

Wednesday, November 1, 2023 14:00to16:00

Patrick Augustin

Challenges and Possibilities in Digital Financial Markets: Risk and Return

By Patrick Augustin

Associate Professor of Finance at the Desautels Faculty of Management at McGill University, Canada Research Chair in Macrofinance and Derivative

With High-Level Panel of Leaders in Science, Technology, On-the-Ground Action, and Policy


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The digital economy has resulted in a significant transformation of the finance sector. The research presented in this webinar focuses on the risk and return characteristics of yield farming investment strategies on PancakeSwap, which is one of the largest auto- mated market makers within the emerging ecosystem of decentralized financial services. PancakeSwap offers various opportunities for earning passive income by pledging pairs of cryptocurrency tokens in liquidity pools and harvesting governance tokens in yield farms. This practice, also known as yield farming, generates performance through different components related to capital gains, trading fee revenue, and farm yields. However, it is exposed to impermanent losses that are non-linearly driven by differential return performance in the underlying cryptocurrency token pairs. The research reveals that yield farming provides positive Sharpe ratios comparable to other cryptocurrency investments and the S&P500 index. However, investment performance decreases significantly after accounting for transaction costs and price impact, which is most significant for farms with the highest headline yields. This can lead to negative risk-adjusted returns. Moreover, it is found that investors in high -yield farms tend to chase past performance and high yields, which leads to negative future returns. These patterns are similar to investment behavior and risk-return characteristics observed in traditional markets, despite the absence of financial intermediaries. Since yield farming is easily accessible to retail investors, this analysis has important implications for the current debate about the regulation of decentralized financial services. A panel discussion will follow to explore real-world solutions further.

About the speaker

Patrick Augustin holds the Canada Research Chair in Macrofinance and Derivative 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 the 2022 recipient of the Bank of Canada Governor’s Award. He holds a PhD degree in Finance from the Stockholm School of Economics and held visiting research positions at the New York University Stern School of Business, the University of California Los Angeles Anderson School of Management, the Stockholm School of Economics, the University of Sydney, and the Luxembourg School of Finance. He is certified as Financial Risk Manager by the Global Association of Risk Professionals and served as a Fellow at the Global Future Councils of the World Economic Forum. Before joining academia, he worked as a structured credit officer at Dexia and as attaché to 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, firm fundamentals and credit risk with a focus on credit derivatives, and law and finance with a focus on insider trading. Most recently, he has become interested in the emergence of digital financial securities. His work has been published in the Journal of Finance, the Review of Financial Studies, the Journal of Financial Economics, the Journal of Monetary Economics, Management Science, and the Journal of Financial and Quantitative Analysis, among others. His work has been widely covered 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 unique synergy between, on the one hand, novel partnerships across sciences, sectors and jurisdictions around targeted domains of real-world solutions, and on the other hand, a next generation convergence of AI with advanced research computing and other data and digital architectures such as PSC’s Bridges-2, and supporting data sharing frameworks such as HuBMAP, informing in a real time as possible the design, deployment and monitoring of solutions for adaptive real-world behaviour and context.

The Precision Convergence Webinar Series is co-hosted by The McGill Centre for the Convergence of Health and Economics (MCCHE) at McGill University and The Pittsburgh Supercomputing Center, a joint computational research centre between Carnegie Mellon University and the University of Pittsburgh.


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