Investing during a Fintech Revolution: Ambiguity and return risk in cryptocurrencies

Behavioural finance and cryptocurrencies

“…Indeed, the research further shows that an increase in news positivity is related with reduced returns dispersion, demonstrating investor convergence. The study of Hidajat (2019) tried to fill the research gap on cryptocurrencies Main findings Al-Mansour (2020) The findings of the study demonstrate that herding theory, prospect theory and heuristic theory have a substantial impact on investors' Bitcoin investing decisions Aloosh and Ouzan (2020) The study shows that the cryptocurrency market has a significant small price bias, which supports the idea that investors respond to news differently depending on the price level Caferra (2020) The results showcase that the peaks and falls of optimism determine returns variability using both cross-sectional standard and absolute deviation Cao and Rhue (2019) They find that positive sentiment contributes significantly negatively to Bitcoin return on the same day (negative sentiment day contributes positively, although not significantly), extending the understanding of disposition effect Grobys and Junttila (2021) The results suggest that parallel to stock markets, similar behavioural mechanisms of underlying investor behaviour are present also in new virtual currency markets Haryanto et al (2020) The analysis reveals that the cryptocurrency market exhibits a reverse disposition effect in bullish periods and the usual positive disposition effect in bearish periods Hidajat (2019) The analysis implies that prices and Bitcoin transactions are more determined by psychological factors Li et al (2020) This research finds that cryptocurrencies with small market value tend to perform better in the future Li et al (2021a, b, c) The results demonstrate that cryptocurrencies with higher maximum daily returns tend to achieve higher returns in the future and call this the "MAX momentum" effect Lin et al (2021) The results showcase a lottery-like momentum, meaning that a higher maximum return leads to a higher future return amongst 64 cryptocurrencies Luo et al (2021) Results show that Bitcoin investors exhibit, on average, an increasing aversion to ambiguity. Furthermore, investors are found to earn abnormal returns only when ambiguity is low Ozdamar et al (2021) The analysis provides evidence for a positive and statistically significant relationship between the maximum daily return within the previous month (MAX) and the expected returns on cryptocurrencies Schatzmann and Haslhofer (2020) The analysis shows that investors are indeed subject to the disposition effect, tending to sell their winning positions too soon and holding on to their losing position for too long Zhang et al (2019) The study finds that investors' response to authority-related news is negative and statistically significant 2020) use behavioural economics to examine the dynamics of Bitcoin pricing.…”

“…The findings of the study demonstrate that herding theory, prospect theory, and heuristic theory have a substantial impact on investors' Bitcoin investing decisions. Finally, Luo et al (2021) introduce a behavioural channel to argue that the degree of ambiguity aversion is a prominent source of abnormal returns from investment in Bitcoin markets. Using data over a ten-year period, they show that Bitcoin investors exhibit, on average, an increasing aversion to ambiguity.…”

The Diversification Benefits of Cryptocurrency Asset Categories and Estimation Risk: Pre and Post COVID-19

“…While the correlation between cryptocurrencies and equity indices has gradually increased as Covid-19 progressed, this increase has been either minimal or modest, suggesting that diversification benefits continue to be derived from cryptocurrencies (Goodwell and Goutte 2021). Luo et al (2021) find an inverse relation between estimation risk and abnormal returns from investment in Bitcoin; particularly during periods of economic uncertainly like the post-Covid-19 period. Mnif, Jarboui, and Mouakhar (2020) find that Covid-19 has had a positive impact on cryptocurrency market efficiency; which is in alignment with Iqbal et al (2021), who find that most cryptocurrencies have had positive returns in response to small increase in the number of Covid-19 cases.…”

Dynamic portfolio choice with uncertain rare-events risk in stock and cryptocurrency markets

“…( 2000 ) to study option pricing and leverage effect in the cryptocurrency market; the second is exemplified by Luo et al. ( 2021 ), who studied the existence of ambiguity aversion in the Bitcoin market and its impact on investor returns. It is natural to integrate the traditional stock market dynamic portfolio choice model and ambiguity in a single framework to analyze the investment decision problem in the cryptocurrency market under ambiguity.…”