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Stop-loss rules and momentum payoffs in cryptocurrencies

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  • Sadaqat, Mohsin
  • Butt, Hilal Anwar

Abstract

Keeping in view the extreme volatility of cryptocurrencies, this study analyzes the efficacy of stop-loss rules for the momentum strategy across 147 cryptocurrencies for the period of January 2015 to June 2022. We find that the stop-loss momentum strategy provides exceedingly higher returns, the Sharpe ratio, and alphas in comparison to other benchmark momentum strategies. In the context of prospect theory, the stop-loss rules work as self-control for investors to realize losses, thereby controlling the disposition effect and as a result, investors can earn significantly higher payoffs. Furthermore, our results provide evidence that the stop-loss momentum strategy outperforms other momentum strategies in all market states. Finally, the robustness analyses reaffirm the importance of implementing the stop-loss rules in managing the downside risk of cryptocurrencies.

Suggested Citation

  • Sadaqat, Mohsin & Butt, Hilal Anwar, 2023. "Stop-loss rules and momentum payoffs in cryptocurrencies," Journal of Behavioral and Experimental Finance, Elsevier, vol. 39(C).
    • Handle: RePEc:eee:beexfi:v:39:y:2023:i:c:s2214635023000473
    DOI: 10.1016/j.jbef.2023.100833
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    More about this item

    Keywords

    Cryptocurrencies; Momentum; Stop-loss strategy; Loss aversion; Disposition bias;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • 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

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