On the (almost) stochastic dominance of cryptocurrency factor portfolios and implications for cryptocurrency asset pricing

Weihao Han; David Newton; Emmanouil Platanakis; Charles Sutcliffe; Xiaoxia Ye

doi:10.1111/eufm.12431

On the (almost) stochastic dominance of cryptocurrency factor portfolios and implications for cryptocurrency asset pricing

Weihao Han, David Newton^* (Corresponding Author), Emmanouil Platanakis, Charles Sutcliffe, Xiaoxia Ye

^*Corresponding author for this work

Accountancy & Finance, Finance

Research output: Contribution to journal › Article › peer-review

1 Citation (Scopus)

Abstract

Cryptocurrency returns are highly nonnormal, casting doubt on the standard performance metrics. We apply almost stochastic dominance, which does not require any assumption about the return distribution or degree of risk aversion. From 29 long–short cryptocurrency factor portfolios, we find eight that dominate our four benchmarks. Their returns cannot be fully explained by the three-factor coin model of Liu et al. So we develop a new three-factor model where momentum is replaced by a mispricing factor based on size and risk-adjusted momentum, which significantly improves pricing performance.

Original language	English
Number of pages	40
Journal	European Financial Management
Early online date	1 Jun 2023
DOIs	https://doi.org/10.1111/eufm.12431
Publication status	E-pub ahead of print - 1 Jun 2023

Bibliographical note

We would like to thank John Doukas (the editor) and two anonymous referees for their invaluable suggestions and help. For helpful comments, we thank Victor DeMiguel (LBS), Adelphe Ekponon (Liverpool), Chris Florackis (Liverpool), YuKun Liu (Rochester), Jayant Rao (Claremont), Richard T. Thakor (Minnesota & MIT), Yang Yang (Tsinghua), Peter Zimmerman (Fed), and conference and seminar participants at University of Bath, University of York, Aston University, University of Southampton, 2021 Southwestern Finance Association Annual Meeting, 28th Annual Global Finance Conference, 2021 Annual Meeting of the European Financial Management Association, 19th Annual Conference of the Hellenic Finance and Accounting Association, 2021 Annual Conference of the British Accounting and Finance Association, 2021 The Finance Symposium, 2021 Annual Conference of the Financial Engineering & Banking Society, and 2021 World Finance Conference, and 2022 Entrepreneurial Finance Association Annual Meeting. All errors are our own. The paper was previously circulated under the title “Cryptocurrency Factor Portfolios: Performance, Decomposition and Pricing Models.”

Data Availability Statement

Data are available from the authors on request, with the caveat that requestors should also be subscribers to parts of the dataset that are derived from commercial providers that require subscription, such as CRSP.

Keywords

almost stochastic dominance
Cryptocurrencies
asset pricing

Access to Document

10.1111/eufm.12431Licence: CC BY

Cite this

@article{57693c0baeb743e39d1fb02f558d8aee,

title = "On the (almost) stochastic dominance of cryptocurrency factor portfolios and implications for cryptocurrency asset pricing",

abstract = "Cryptocurrency returns are highly nonnormal, casting doubt on the standard performance metrics. We apply almost stochastic dominance, which does not require any assumption about the return distribution or degree of risk aversion. From 29 long–short cryptocurrency factor portfolios, we find eight that dominate our four benchmarks. Their returns cannot be fully explained by the three-factor coin model of Liu et al. So we develop a new three-factor model where momentum is replaced by a mispricing factor based on size and risk-adjusted momentum, which significantly improves pricing performance.",

keywords = "almost stochastic dominance, Cryptocurrencies, asset pricing",

author = "Weihao Han and David Newton and Emmanouil Platanakis and Charles Sutcliffe and Xiaoxia Ye",

note = "We would like to thank John Doukas (the editor) and two anonymous referees for their invaluable suggestions and help. For helpful comments, we thank Victor DeMiguel (LBS), Adelphe Ekponon (Liverpool), Chris Florackis (Liverpool), YuKun Liu (Rochester), Jayant Rao (Claremont), Richard T. Thakor (Minnesota & MIT), Yang Yang (Tsinghua), Peter Zimmerman (Fed), and conference and seminar participants at University of Bath, University of York, Aston University, University of Southampton, 2021 Southwestern Finance Association Annual Meeting, 28th Annual Global Finance Conference, 2021 Annual Meeting of the European Financial Management Association, 19th Annual Conference of the Hellenic Finance and Accounting Association, 2021 Annual Conference of the British Accounting and Finance Association, 2021 The Finance Symposium, 2021 Annual Conference of the Financial Engineering & Banking Society, and 2021 World Finance Conference, and 2022 Entrepreneurial Finance Association Annual Meeting. All errors are our own. The paper was previously circulated under the title “Cryptocurrency Factor Portfolios: Performance, Decomposition and Pricing Models.” ",

year = "2023",

month = jun,

day = "1",

doi = "10.1111/eufm.12431",

language = "English",

journal = "European Financial Management",

issn = "1354-7798",

publisher = "Wiley-Blackwell",

}

TY - JOUR

T1 - On the (almost) stochastic dominance of cryptocurrency factor portfolios and implications for cryptocurrency asset pricing

AU - Han, Weihao

AU - Newton, David

AU - Platanakis, Emmanouil

AU - Sutcliffe, Charles

AU - Ye, Xiaoxia

N1 - We would like to thank John Doukas (the editor) and two anonymous referees for their invaluable suggestions and help. For helpful comments, we thank Victor DeMiguel (LBS), Adelphe Ekponon (Liverpool), Chris Florackis (Liverpool), YuKun Liu (Rochester), Jayant Rao (Claremont), Richard T. Thakor (Minnesota & MIT), Yang Yang (Tsinghua), Peter Zimmerman (Fed), and conference and seminar participants at University of Bath, University of York, Aston University, University of Southampton, 2021 Southwestern Finance Association Annual Meeting, 28th Annual Global Finance Conference, 2021 Annual Meeting of the European Financial Management Association, 19th Annual Conference of the Hellenic Finance and Accounting Association, 2021 Annual Conference of the British Accounting and Finance Association, 2021 The Finance Symposium, 2021 Annual Conference of the Financial Engineering & Banking Society, and 2021 World Finance Conference, and 2022 Entrepreneurial Finance Association Annual Meeting. All errors are our own. The paper was previously circulated under the title “Cryptocurrency Factor Portfolios: Performance, Decomposition and Pricing Models.”

PY - 2023/6/1

Y1 - 2023/6/1

N2 - Cryptocurrency returns are highly nonnormal, casting doubt on the standard performance metrics. We apply almost stochastic dominance, which does not require any assumption about the return distribution or degree of risk aversion. From 29 long–short cryptocurrency factor portfolios, we find eight that dominate our four benchmarks. Their returns cannot be fully explained by the three-factor coin model of Liu et al. So we develop a new three-factor model where momentum is replaced by a mispricing factor based on size and risk-adjusted momentum, which significantly improves pricing performance.

AB - Cryptocurrency returns are highly nonnormal, casting doubt on the standard performance metrics. We apply almost stochastic dominance, which does not require any assumption about the return distribution or degree of risk aversion. From 29 long–short cryptocurrency factor portfolios, we find eight that dominate our four benchmarks. Their returns cannot be fully explained by the three-factor coin model of Liu et al. So we develop a new three-factor model where momentum is replaced by a mispricing factor based on size and risk-adjusted momentum, which significantly improves pricing performance.

KW - almost stochastic dominance

KW - Cryptocurrencies

KW - asset pricing

U2 - 10.1111/eufm.12431

DO - 10.1111/eufm.12431

M3 - Article

SN - 1354-7798

JO - European Financial Management

JF - European Financial Management

ER -

On the (almost) stochastic dominance of cryptocurrency factor portfolios and implications for cryptocurrency asset pricing

Abstract

Bibliographical note

Data Availability Statement

Keywords

Access to Document

Fingerprint

Cite this