Stop-loss rules and momentum payoffs in cryptocurrencies

Mohsin Sadaqat and Hilal Anwar Butt

Journal of Behavioral and Experimental Finance, 2023, vol. 39, issue C

Abstract: Keeping in view the extreme volatility of cryptocurrencies, this study analyzes the efficacy of stop-loss rules for the momentum strategy across 147 cryptocurrencies for the period of January 2015 to June 2022. We find that the stop-loss momentum strategy provides exceedingly higher returns, the Sharpe ratio, and alphas in comparison to other benchmark momentum strategies. In the context of prospect theory, the stop-loss rules work as self-control for investors to realize losses, thereby controlling the disposition effect and as a result, investors can earn significantly higher payoffs. Furthermore, our results provide evidence that the stop-loss momentum strategy outperforms other momentum strategies in all market states. Finally, the robustness analyses reaffirm the importance of implementing the stop-loss rules in managing the downside risk of cryptocurrencies.

Keywords: Cryptocurrencies; Momentum; Stop-loss strategy; Loss aversion; Disposition bias (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:beexfi:v:39:y:2023:i:c:s2214635023000473

DOI: 10.1016/j.jbef.2023.100833

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