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Common risk factors in the returns on cryptocurrencies

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  • Liu, Weiyi
  • Liang, Xuan
  • Cui, Guowei

Abstract

This paper identifies three common risk factors in the returns on cryptocurrencies, which are related to cryptocurrency market return, market capitalization (size) and momentum of cryptocurrencies. Investigating a collection of 78 cryptocurrencies, we find that there are anomalous returns that decrease with size and increase with return momentum, and the momentum effect is more significant in small cryptocurrencies. Moreover, Fama-Macbeth regressions show the size and momentum combine to capture the cross-sectional variation in average cryptocurrency returns. In the tests of the three-factor model, we find most cryptocurrencies and their portfolios have significant exposures to the proposed three factors with insignificant intercepts, demonstrating that the three factors explain average cryptocurrency returns very well.

Suggested Citation

  • Liu, Weiyi & Liang, Xuan & Cui, Guowei, 2020. "Common risk factors in the returns on cryptocurrencies," Economic Modelling, Elsevier, vol. 86(C), pages 299-305.
  • Handle: RePEc:eee:ecmode:v:86:y:2020:i:c:p:299-305
    DOI: 10.1016/j.econmod.2019.09.035
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    Cited by:

    1. Long, Huaigang & Zaremba, Adam & Demir, Ender & Szczygielski, Jan Jakub & Vasenin, Mikhail, 2020. "Seasonality in the Cross-Section of Cryptocurrency Returns," Finance Research Letters, Elsevier, vol. 35(C).
    2. Zhang, Wei & Li, Yi, 2020. "Is idiosyncratic volatility priced in cryptocurrency markets?," Research in International Business and Finance, Elsevier, vol. 54(C).
    3. Victoria Dobrynskaya, 2020. "Is Downside Risk Priced In Cryptocurrency Market?," HSE Working papers WP BRP 79/FE/2020, National Research University Higher School of Economics.

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    More about this item

    Keywords

    Cryptocurrency; Market return; Size; Momentum; Factor model;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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