Common Risk Factors in Cryptocurrency

One Cryptocurrency to Explain Them All? Understanding the Importance of Bitcoin in Cryptocurrency Returns

“…A scree test (plots shown in Appendix ) suggests that retaining one principal component should be sufficient for PCA. The proportion of variance explained by PC1 declines as we move from Q1 to Q4 (consistent with the crypto size factor of Liu et al , 2019) which suggests that the fundamental factor underlying PC1 appears to be less informative for smaller cryptocurrencies.…”

“…More recently, the literature has applied asset‐pricing techniques to cryptocurrencies in an attempt to identify factors that explain excess returns. The most successful appear to be crypto‐specific factors such as investor attention, size and momentum (Liu & Tsyvinski, 2018; Borri & Shakhnov, 2019; Liu et al , 2019). We contribute to this area of the literature by investigating the drivers of cryptocurrency returns.…”

The Cross-Section of Risk and Return

“…Finally, our paper connects to the recent vintage of papers that revisits the question of how to combine characteristics into tradable portfolios (see Gu, Kelly, and Xiu, 2018;Huang, Li, and Zhou, 2018;Freyberger, Neuhierl, and Weber, 2018;Kozak, Nagel, and Santosh, 2019;Liu, Tsyvinski, and Wu, 2019). These papers all take as their starting point a set of characteristics that explain average excess returns.…”

Understanding Cryptocurrencies*

“…Petukhina et al (2018) find that due to the volatility structure of cryptocurrencies, the application of traditional risk-based portfolios -such as equal-risk contribution, minimum-variance and minimum-CVaR portfolios -does not boost the performance of investments significantly. Liu et al (2019a) examine common risk factors in cryptocurrencies, and capture the cross-sectional expected cryptocurrency returns. By considering a comprehensive list of price-and market-related factors in the stock market, they construct cryptocurrency counterparts.…”