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Long and short-term impacts of regulation in the cryptocurrency market

Author

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  • Ahmad Chokor

    (CERAG - Centre d'études et de recherches appliquées à la gestion - UGA - Université Grenoble Alpes)

  • Élise Alfieri

    (IRG - Institut de Recherche en Gestion - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12 - Université Gustave Eiffel)

Abstract

Since cryptocurrencies were first created, the related markets have been known for their fluctuations, whether in terms of high volatility or illiquidity. Partially for those reasons, public authorities and regulators around the world have frequently attempted to regulate those markets. We aim in our study to examine whether cryptocurrency traders perceive market regulation in a beneficial way. Using an event study methodology for daily data covering the 2015-2019 period, we assess how regulatory news and events have affected returns in cryptocurrency markets. We further assess whether financial cryptocurrency characteristics and in particular their liquidity can explain cross-sectional variations in cryptocurrency return reactions. The results suggest that events that increase the probability of regulation adoption are associated with negative abnormal returns for the cryptocurrencies concerned. We also find that the magnitude of the return reactions is not the same across all the cryptocurrencies in our sample. We show that investors reacted less negatively for the most illiquid cryptocurrencies and for those that incurred more information asymmetry risk. Finally, we analyze a longer-term effect of regulatory events by studying the performance of cryptocurrencies. The risk-adjusted return in the preevent period is positive and significant, but it appears not to be significantly different from zero in the post-event period.

Suggested Citation

  • Ahmad Chokor & Élise Alfieri, 2021. "Long and short-term impacts of regulation in the cryptocurrency market," Post-Print hal-03275473, HAL.
    • Handle: RePEc:hal:journl:hal-03275473
    DOI: 10.1016/j.qref.2021.05.005
    Note: View the original document on HAL open archive server: https://hal.science/hal-03275473
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    Cited by:

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    3. Griffith, Todd & Clancey-Shang, Danjue, 2023. "Cryptocurrency regulation and market quality," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 84(C).
    4. Almeida, José & Gonçalves, Tiago Cruz, 2023. "A systematic literature review of investor behavior in the cryptocurrency markets," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).
    5. Daehan Kim & Mehmet Huseyin Bilgin & Doojin Ryu, 2021. "Are suspicious activity reporting requirements for cryptocurrency exchanges effective?," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-17, December.
    6. Élise Alfieri & Yann Ferrat, 2022. "The larger compensation for miners, the higher positive effect on the financial performance of cryptocurrencies [Une meilleure rémunération des mineurs : un effet positif sur la performance financi," Post-Print hal-03670074, HAL.
    7. Kumar Kulbhaskar, Anamika & Subramaniam, Sowmya, 2023. "Breaking news headlines: Impact on trading activity in the cryptocurrency market," Economic Modelling, Elsevier, vol. 126(C).
    8. Babaei, Golnoosh & Giudici, Paolo & Raffinetti, Emanuela, 2022. "Explainable artificial intelligence for crypto asset allocation," Finance Research Letters, Elsevier, vol. 47(PB).

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