Rotman School of Management, University of Toronto

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Research

FinHub actively contributes to academic and applied research in finance.

Applied Industry Research Project | Student Summer Projects | Academic Papers

Applied Research Project


Andreas Veneris, Andreas Park, Fan Long, and Poonam Puri Central Bank Digital Loonie: Canadian Cash for a New Global Economy, Final Report for the Bank of Canada’s Model X Challenge

Executive Summary

Today’s global economic digitization of society, driven by technology trends, continues to advance at exponential speeds. Billions of Internet of Things devices have already made their way into our daily lives, our homes and cars, but also into health care, manufacturing, supply-chains and other infrastructure. This development is in sharp contrast to the financial sector which still operates on legacy infrastructure(s). The net-effect is that current systems of payment lack the flexibility to adapt to the digitization of the economy. They remain slow, clunky, and expensive; often one receives a digital service, or even physical goods, faster than the merchant receives the payment. Further, the emergence of Decentralized Finance, through blockchain technology, has already demonstrated a capacity to disrupt the financial sector, impact national sovereignty, and affect established monetary transmission channels. Hence, it is no surprise that nations and tech-firms are now building new digital infrastructures for finance, banking, and payments that circumvent those legacy practices.

Governments around the globe equivalently find themselves in an awkward position. On the one hand, monetary policies rely on the established functions of the financial sector. For many decades, banks have conveniently served as deputies in enacting those policies, along with efforts to squash money laundering, tax evasion, and the financing of terrorism. On the other hand, over the past decade, governments have publicly recognized the need to enable digital innovation to keep their economies competitive. Further, they acknowledge the responsibility to enable their citizens to protect their privacy from unabridged data harvesting, and the need for financial inclusion in core economic national activities, irrespective of means and location. Finally, economies such as Canada’s risk that their home currency is displaced, or their national security gets severely compromised, if consumers and businesses alike flee to a more convenient, let alone foreign, digital payments alternative.

Against this backdrop, in recent years many central banks have raced to explore, research and test the issuance of digitally native money, or Central Bank-issued Digital Currencies (CBDCs), in an effort to rediscover the very essence and use of “fiat cash”. The Bank of Canada (BoC) has emerged as a thought leader on CBDCs at an international level having spent almost a decade and significant resources on this endeavour. The Bank is now preparing to put itself in a position where it can issue a digital loonie should certain conditions mandate it. As the BoC has been contemplating the design of a CBDC for some time, given the scale of the particular enterprise, it wanted to sample ideas at arm’s length. To do this, in early 2020, the Bank ran a competition among universities to research and propose a CBDC design. Being a finalist in this competition, this manuscript presents a design proposal for a Central Bank Digital Loonie (CBDL) based on careful academic research of the possible technological, legal, and economic components of such an unprecedented and historic expedition.

Additional Resources:

https://slides.com/ap248/cdbl-report/
https://www.youtube.com/playlist?list=PLTmzBTSqnXduG8kmgSYUx0eblM50BQcFw

Danielle Goldfarb and Andreas Park, Will Libra Succeed? Results of a Global Randomized Survey Experiment

Executive Summary: 

Facebook’s cryptocurrency project Libra -- and the associated impacts on banks, central banks, the global payments and trading system, and others -- hinges on the widespread and global adoption of the digital currency, especially amongst young people in emerging markets.

To assess the likelihood of Libra adoption, we deploy a survey of 5000+ respondents in the U.S., India, and Nigeria, asking whether respondents are prepared to use money that has been issued by a technology company, and whether, if they own a business, they are willing to accept such money.

Consilium Crypto

Development of reference rates fro crypto assets

RIWI

Financial related microsurveys

Student Summer Projects


Summer 2018

Industry Sponsors: TD BankBluepierCogniframeKarenTransunionOverbond, and Vexo.

Accepted Student Profiles: 3 Rotman Commerce, 5 Rotman MBA, 4 BSc. (Computer science, Math, Financial Economics), 1 MSc. (Computer science), 14 M Eng.

Other Facts: Projects engaged 12 faculty mentors, 7 from Rotman and 5 from engineering. Students working with TD were employed by TD. Students working with the other companies (startups) were employed by Rotman and paid through the FinHub budget.

Academic Papers


Darcy Drury and Fatima Saya, A Call to Arms for PayTech

Abstract: A Call to Arms for PayTech: The Future of Payment in Canada
The following is based upon three pillars. First, it incorporates themes and insights from a two-hour roundtable discussion held at the Rotman School of Management on February 22nd, 2019 composed of leading investors, businesses, regulators, and academics. Chatham House rules were in effect. Second, several interviews were undertaken to further develop these themes and insights. Third, additional research was undertaken to complement the contents herein.

Andreas Park and Katya Malinova, Market Design with Blockchain Technology

Abstract: A Call to Arms for PayTech: The Future of Payment in Canada
The following is based upon three pillars. First, it incorporates themes and insights from a two-hour roundtable discussion held at the Rotman School of Management on February 22nd, 2019 composed of leading investors, businesses, regulators, and academics. Chatham House rules were in effect. Second, several interviews were undertaken to further develop these themes and insights. Third, additional research was undertaken to complement the contents herein.

Andreas Park and Katya Malinova, Tokenomics: When Tokens Beat Equity (PaperMedium ArticleLecture)

Abstract: In an initial coin offering, investors fund a venture in exchange for tokens that grant rights to future economic output. To many financial industry insiders, tokens have no intrinsic merit and exist only as a way to evade regulations. We demonstrate that generic revenue-based token contracts are indeed economically inferior to equity and lead to over- or under-production. However, an optimally designed token contract, which is a combination of an output presale and an incremental revenue sharing agreement, yields the same payoffs as equity. Moreover, with entrepreneurial moral hazard, tokens can finance a strictly larger set of ventures than equity.

Pat Akey, Vincent Gregoire, and Charles Martineau, Retail Insider Trading and Market Price Efficiency: Evidence from Hacked Earnings News

Abstract: From 2010--2015, a group of convicted traders accessed earnings information hours before their public release by hacking several major newswire services. We use their "insider" trading as a natural experiment to investigate how efficiently markets incorporate private information in prices. 15% of a firm’s earnings surprise was incorporated into its stock price prior to its public release when the hackers had access to non-public information. Volume and spread-based measures of informed trading detect this activity, but order flow-based measures do not. We find evidence that uninformed, professional traders traded in the same direction, amplifying the impact of informed trading.

Jay Cao, Jacky Chen, and John Hull, A Neural Network Approach to Understanding Implied Volatility Movements

Abstract: We employ neural networks to understand volatility surface movements. We first use daily data on options on the S&P 500 index to derive a relationship between the expected change in implied volatility and three variables: the return on the index, the moneyness of the option, and the remaining life of the option. This model provides an improvement of 10.72% compared with a simpler analytic model. We then enhance the model with an additional feature: the level of the VIX index prior to the return being observed. This produces a further improvement of 62.12% and shows that the expected response of the volatility surface to movements in the index is quite different in high and low volatility environments.

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