Triangular No‐arbitrage Estimation through Bitcoin: An Application in Venezuelan Bolivars

• DOI: http://doi.org/10.1111/ajfs.12223
• Published date: 01 August 2018
• Author: Yuan‐Teng Hsu,Chih‐Chun Chen,Jying‐Nan Wang
• Date: 01 August 2018

Triangular No-arbitrage Estimation through

Bitcoin: An Application in Venezuelan

Bolivars*

Jying-Nan Wang

School of Economics and Management, Chongqing University of Posts and Telecommunications, China

Yuan-Teng Hsu**

Research Center of Finance, Shanghai Business School, China

Chih-Chun Chen

Department of Applied Economics and Management, National Ilan University, Taiwan

Received 31 July 2017; Accepted 5 March 2018

Abstract

In this study, we apply the Bitcoin to estimate the price of the Venezuelan bolivar, due to

the unreliability of this currency’s official exchange rate. Our approach is based on the trian-

gular no-arbitrage condition and takes the Bitcoin as an intermediate currency. To verify its

validity, in addition to bolivars, six currencies are first considered in the empirical study. We

find that trading through the Bitcoin market produces higher transaction costs or requires

higher risk compensation than trading through the conventional exchange market. Then, we

explore the Venezuelan case. Comparing the estimates of the black market bolivars, which

are generated from several popular media sources and the Web site Dolartoday.com, using

Bitcoin can produce reliable bolivar exchange rates quickly and easily. To sum up, we verify

the feasibility of using the triangular no-arbitrage condition in foreign exchange markets to

estimate exchange rates through the Bitcoin. This is especially useful when capital controls

exist such as they do in Venezuela.

Keywords Foreign exchange; Bitcoin; Black-Market Bolivars

JEL Classification: G12, G14, G18

*The authors would like to express their sincere appreciation to the editor and the anony-

mous referees for their valuable comments and suggestions. All authors contributed equally

to this manuscript.

**Corresponding author: Research Center of Finance, Shanghai Business School, 2271 West

Zhong Shan Rd, Shanghai 200235, China. Tel: +86-21-64870020 ext 1404, Fax: +86-21-3719-

0027, email: yuanteng.hsu@gmail.com

Asia-Pacific Journal of Financial Studies (2018) 47, 529–545 doi:10.1111/ajfs.12223

©2018 Korean Securities Association 529

1. Introduction

Venezuela, an oil exporting and import-dependent economy, is experiencing an

extreme economic crisis due to many economic policies that have adversely affected

its economy. These policies include restrictions on foreign exchange transactions.

More importantly, according to the World Economic Forum,

1

Venezuela intro-

duced the CADIVI Commission in 2003, which restricted currency conversion and

the repatriation of profits or capital for foreign companies. The Venezuelan Govern-

ment, as reported by G

omez et al. (2016), has also provided other systems to

improve its foreign exchange market, including two new exchange mechanisms,

DIPRO and DICOM, but the use of these systems is sporadic and trading volume is

very low. Thus, international companies continue to reduce investments and there

is a scarcity of foreign currency in the country. According to the International

Monetary Fund, the consumer price inflation rate in Venezuela was about 480% in

2016. Moreover, the value of the bolivar is falling so dramatically that on 1 Novem-

ber 2016 US$1 was worth 1567 bolivars and 27 days later, on 28 November 2016,

US$1 was equal to 3480 bolivars (https://dolartoday.com/). The above exchange

rates, however, are black market rates, not Venezuela’s official rates.

The calculation of black market Venezuelan bolivars on Dolartoday.com is an

unusual case. As shown in Kurmanaev (2016), the observable black market prices

on Dolartoday.com are tracked by Gustavo D

ıaza, a Home Depot Inc. employee

in Alabama. Mr. D

ıaza reports the b lack market price of the bolivar throu gh the

price of every product in Venezuela, including food, medicines, and cars. In this

study,wedonotdistrustthereliabilityofthismarketprice,butwewanttover-

ify it through a more systematic approach based on the triangular no-arbitrage

condition. In foreign exchange markets, this condition implies an affirmative

relationship between any pair of specific currency rates and the corresponding

cross-rate. Nevertheless, owing to restrictions in the Venezuelan foreign exchange

market, there is no reliable conventional exchange available. Interestingly, the

bolivar can be traded in the LocalBitcoin and its price is observable.

2

Thus, we

attempt to use the Bitcoin as an intermediate currency to estimate the price of

the bolivar.

Most Bitcoin studies have focused on transaction security, blockchains, and

privacy, but some recent literature has also discussed it from an economic or

application viewpoint. For example, the economic bubble of Bitcoin detections is

proposed in Cheah and Fry (2015) and Cheung et al. (2015), and a few bubbles

were observed in 2011–2013. In terms of portfolio management, Briere et al.

(2015) show that Bitcoin provides significant diversification benefits for investors

1

Available at http://www3.weforum.org/docs/Media/WEF_RM%20Report%202015.pdf.

2

At LocalBitcoins.com, people from different countries can buy Bitcoin in their own cur-

rency. Ads for selling Bitcoin detail the payment method and the exchange rate. People can

choose direct online transactions or spot cash transactions in accordance with the ad content.

J.-N. Wang

530 ©2018 Korean Securities Association