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Abstract
Global financial markets have been dramatically changing over the last decade. More research is needed to understand the fundamental forces behind this market evolution, and how these forces have reshaped the financial market infrastructure. My dissertation investigates three significant issues at the heart of this transformation: the network of the growing crowd of retail investors in the U.S. equity market; the market impact of perpetual contracts (perps), a financial innovation that has seen phenomenal trading volume in the cryptocurrency space; and the transactions between cryptocurrencies, stablecoin, and fiat currency in India.
Chapter 1 investigates the network structure of retail investor trading and its consequences for the U.S. equity market. Using Nasdaq’s Retail Trading Activity Tracker (RTAT) from 2016 to 2024, I construct a directed network of stocks based on lead-lag correlations in retail trading volume. The methodology is first validated using the iShares Bitcoin Trust (IBIT) as a prototype. This approach identifies economically meaningful peers, including crypto-related firms, growth tech stocks, large-cap ETFs, and inflation-hedging ETFs, whose metrics predict IBIT’s market dynamics. Applying this network framework to U.S. common stocks, I find that the average return of a stock’s retail trading peers robustly predicts its future returns. I demonstrate that the effect operates through two primary channels: (1) price discovery, where retail networks aggregate dispersed information, evidenced by stronger effects when peer average ret is positive, the peer-minus-own return gap is large, during “Buy the Dip” episodes, and in weaker institutional information environments; and (2) liquidity provision, where coordinated retail buying systematically provides depth to the market, particularly on the bid side, leading market makers to widen spreads to compensate for adverse selection risk. The return predictability is persistent and does not reverse, suggesting the permanent incorporation of new information rather than temporary price pressure. Finally, I extend the analysis across the full CRSP universe, revealing that the peer effect is a pervasive phenomenon. It is statistically significant across various asset types—including common stocks, a foreign stocks, REITs, ETPs, and American Depositary Receipts (ADRs)—and exchanges. The effect’s magnitude varies logically across market segments, proving stronger for assets with higher information asymmetry, such as ADRs, and more pronounced on NASDAQ than on the NYSE. In contrast, volatility-linked products on the Cboe exchange do not exhibit significant cross-predictability.
Chapter 2 examines perpetual futures contracts' impact on cryptocurrency spot market quality. Using high-frequency order book data from cryptocurrency exchanges between 2017 and 2023, we document that spot market quality follows a U-shaped pattern over perpetual contracts' eight-hour funding cycles. Exploiting both the exogenous termination of perpetual trading at Huobi Exchange and 95 staggered contract introductions, we identify a seemingly puzzling liquidity pattern: perpetual contracts increase spot trading volume while widening quoted spreads. To resolve this puzzle, we demonstrate that this pattern reflects increased informed trading, particularly during funding settlement hours and periods of larger funding fee magnitudes. Market makers respond to heightened adverse selection risk by widening quoted spreads.
Chapter 3 studies the relationship between inflation expectations and cryptocurrency investment in India. Using proprietary data from the predominant cryptocurrency exchange in India together with the country's Household Inflation Expectations Survey, we document a significantly positive association between inflation expectations and individual cryptocurrency purchases. The effect is concentrated in Bitcoin (BTC) and Tether (USDT) trading, and remains robust after controlling for speculative demand captured by surveys of investors' expected cryptocurrency returns. Higher inflation expectations are also associated with more new investors entering cryptocurrencies. These results have causal interpretations as confirmed by instrumental variables. Our findings provide direct evidence that households already adopt cryptocurrencies for inflation hedging, which in turn rationalizes their high adoption in developing countries without a globally dominant currency.
Modern financial market infrastructure is shaped not only by technologies and governing institutions, but also by the people who participate within it. The research demonstrates the role of people, showing that retail investors in the U.S. equity market—with over 100 million accounts and commanding an asset size comparable to the U.S. GDP—have become integral to the functioning of financial markets for price discovery and liquidity provision. On the technology front, this dissertation investigates how novel instruments like perpetual contracts affect market quality, shedding light on their broader applications beyond the cryptocurrency sandbox. And from an institutional perspective, the research investigates the market impact of the 2021 Chinese regulatory changes concerning cryptocurrencies, offering critical insights into the global regulatory landscape.
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