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
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
11 June 2022
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).
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
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© 2022 Elsevier B.V.
Keywords:
Cryptocurrency, Prospect Theory, behavioural asset pricing, cross-section of returns
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Local EPrints ID: 458065
URI: http://eprints.soton.ac.uk/id/eprint/458065
ISSN: 1042-4431
PURE UUID: bd648bd8-f2b6-45c6-9fb8-99ed809b1c3d
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Date deposited: 28 Jun 2022 16:32
Last modified: 17 Mar 2024 03:59
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Author:
Rongxin Chen
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