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Momentum and contrarian effects on the cryptocurrency market

Author

Listed:
  • Krzysztof Kość

    () (Quantitative Finance Research Group, Faculty of Economic Sciences, University of Warsaw, Labyrinth HF)

  • Paweł Sakowski

    (Quantitative Finance Research Group, Faculty of Economic Sciences, University of Warsaw, Labyrinth HF)

  • Robert Ślepaczuk

    (Quantitative Finance Research Group, Faculty of Economic Sciences, University of Warsaw, Labyrinth HF)

Abstract

We report the results of investigation of the momentum and contrarian effects on cryptocurrency markets. The investigated investment strategies involve 100 (amongst over 1200 present as of date Nov 2017) cryptocurrencies with the largest market cap and average 14-day daily volume exceeding a given threshold value. Investment portfolios are constructed using different assumptions regarding the portfolio reallocation period, width of the ranking window, the number of cryptocurrencies in the portfolio, and the percent transaction costs. The performance is benchmarked against: (1) equally weighted and (2) market-cap weighted investments in all of the ranked assets, as well as against the buy and hold strategies based on (3) S&P500 index, and (4) BTCUSD price. Our results show a clear and significant dominance of the short-term contrarian effect over both momentum effect and the benchmark portfolios. The information ratio coefficient for the contrarian strategies often exceeds two-digit values depending on the assumed reallocation period and the width of the ranking window. Additionally, we observe a very significant diversification potential for all cryptocurrency portfolios with relation to the S&P500 index.

Suggested Citation

  • Krzysztof Kość & Paweł Sakowski & Robert Ślepaczuk, 2018. "Momentum and contrarian effects on the cryptocurrency market," Working Papers 2018-09, Faculty of Economic Sciences, University of Warsaw.
  • Handle: RePEc:war:wpaper:2018-09
    as

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    File URL: https://www.wne.uw.edu.pl/index.php/download_file/4146/
    File Function: First version, 2018
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    cryptocurrencies; bitcoin; blockchain; momentum effect; contrarian effect; investment strategy; efficiency of financial markets; new asset class; asset allocation;

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • F30 - International Economics - - International Finance - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • 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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