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Explaining cryptocurrency returns: A prospect theory perspective

Explaining cryptocurrency returns: A prospect theory perspective
Explaining cryptocurrency returns: A prospect theory perspective

We investigate prospect theory's ability to explain cryptocurrency returns using data concerning 1,573 cryptocurrencies over the period 2014–2020. In line with the theory's predictions, we find that cryptocurrencies that are more (less) attractive from a prospect theory perspective earn lower (higher) future returns, suggesting that they tend to be overpriced (under priced). On average, a one cross-sectional standard-deviation increase in the prospect theory value of a cryptocurrency reduces its next-week return by 0.71% relative to its peers. This effect is stronger among cryptocurrencies that are more difficult to arbitrage, but it is not confined to the micro-cap segment of the market.

Cryptocurrency, Prospect Theory, behavioural asset pricing, cross-section of returns
1042-4431
Chen, Rongxin
abbbb245-661f-413e-8b2e-69bdb4eaae8b
Lepori, Gabriele
551865b7-2e3a-4de1-aaf9-6c7f23e32e8d
Tai, Chung-Ching
b3370b23-7410-4254-99bc-6711046e1095
Sung, Ming-Chien
2114f823-bc7f-4306-a775-67aee413aa03
Chen, Rongxin
abbbb245-661f-413e-8b2e-69bdb4eaae8b
Lepori, Gabriele
551865b7-2e3a-4de1-aaf9-6c7f23e32e8d
Tai, Chung-Ching
b3370b23-7410-4254-99bc-6711046e1095
Sung, Ming-Chien
2114f823-bc7f-4306-a775-67aee413aa03

Chen, Rongxin, Lepori, Gabriele, Tai, Chung-Ching and Sung, Ming-Chien (2022) Explaining cryptocurrency returns: A prospect theory perspective. Journal of International Financial Markets, Institutions and Money, 79, [101599]. (doi:10.1016/j.intfin.2022.101599).

Record type: Article

Abstract

We investigate prospect theory's ability to explain cryptocurrency returns using data concerning 1,573 cryptocurrencies over the period 2014–2020. In line with the theory's predictions, we find that cryptocurrencies that are more (less) attractive from a prospect theory perspective earn lower (higher) future returns, suggesting that they tend to be overpriced (under priced). On average, a one cross-sectional standard-deviation increase in the prospect theory value of a cryptocurrency reduces its next-week return by 0.71% relative to its peers. This effect is stronger among cryptocurrencies that are more difficult to arbitrage, but it is not confined to the micro-cap segment of the market.

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Submitted date: 27 October 2021
Accepted/In Press date: 6 June 2022
e-pub ahead of print date: 11 June 2022
Published date: 11 June 2022
Additional Information: Publisher Copyright: © 2022 Elsevier B.V.
Keywords: Cryptocurrency, Prospect Theory, behavioural asset pricing, cross-section of returns

Identifiers

Local EPrints ID: 458065
URI: http://eprints.soton.ac.uk/id/eprint/458065
ISSN: 1042-4431
PURE UUID: bd648bd8-f2b6-45c6-9fb8-99ed809b1c3d
ORCID for Rongxin Chen: ORCID iD orcid.org/0000-0003-2210-8824
ORCID for Gabriele Lepori: ORCID iD orcid.org/0000-0002-2619-227X
ORCID for Chung-Ching Tai: ORCID iD orcid.org/0000-0002-2557-177X
ORCID for Ming-Chien Sung: ORCID iD orcid.org/0000-0002-2278-6185

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Date deposited: 28 Jun 2022 16:32
Last modified: 16 Nov 2022 02:54

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Contributors

Author: Rongxin Chen ORCID iD
Author: Gabriele Lepori ORCID iD
Author: Chung-Ching Tai ORCID iD
Author: Ming-Chien Sung ORCID iD

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