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The pricing of bad contagion in cryptocurrencies: A four-factor pricing model

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  • Shahzad, Syed Jawad Hussain
  • Bouri, Elie
  • Ahmad, Tanveer
  • Naeem, Muhammad Abubakr
  • Vo, Xuan Vinh

Abstract

We examine as if the incorporation of the contagion risk, which is found significant in cryptocurrencies, can make the resulting four-factor pricing model offers an improved explanatory power. We estimate contagion measure for the large left-tail events in the idiosyncratic disturbances of cryptocurrencies and then incorporate it into the three-factor pricing model. Using data of 1,967 cryptocurrencies from January 1, 2015 to September 26, 2019, we show that the four-factor pricing model outperforms both the cryptocurrency-CAPM and three-factor models. Our findings are useful to researchers of cryptocurrency anomalies and those applying quantitative strategies in the cryptocurrency market.

Suggested Citation

  • Shahzad, Syed Jawad Hussain & Bouri, Elie & Ahmad, Tanveer & Naeem, Muhammad Abubakr & Vo, Xuan Vinh, 2021. "The pricing of bad contagion in cryptocurrencies: A four-factor pricing model," Finance Research Letters, Elsevier, vol. 41(C).
    • Handle: RePEc:eee:finlet:v:41:y:2021:i:c:s1544612320316111
    DOI: 10.1016/j.frl.2020.101797
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    Cited by:

    1. Mudassar Hasan & Muhammad Abubakr Naeem & Muhammad Arif & Syed Jawad Hussain Shahzad & Xuan Vinh Vo, 2022. "Liquidity connectedness in cryptocurrency market," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-25, December.
    2. Abubakr Naeem, Muhammad & Iqbal, Najaf & Lucey, Brian M. & Karim, Sitara, 2022. "Good versus bad information transmission in the cryptocurrency market: Evidence from high-frequency data," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 81(C).
    3. Goodell, John W. & Alon, Ilan & Chiaramonte, Laura & Dreassi, Alberto & Paltrinieri, Andrea & Piserà, Stefano, 2023. "Risk substitution in cryptocurrencies: Evidence from BRICS announcements," Emerging Markets Review, Elsevier, vol. 54(C).

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    More about this item

    Keywords

    Asset pricing; factors model; bad contagion; cryptocurrencies;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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