The pricing of jump and diffusive risks in the cross-section of cryptocurrency returns

Minhao Leong and Simon Kwok

Journal of Empirical Finance, 2023, vol. 74, issue C

Abstract: In this study, we investigate the pricing of risks in the cross-section of cryptocurrency returns. In doing so, we decompose total variations into systematic and idiosyncratic components, as well as differentiate jumps from diffusive variations. We show that a hedged portfolio sorted on idiosyncratic diffusive risk yields a weekly return of -1.11%, suggesting the existence of a low idiosyncratic risk anomaly. Subsequently, we examine explanations for this anomaly, and show that limits to arbitrage prevent arbitrageurs from fully correcting the mispricing.

Keywords: Cryptocurrency asset pricing; Jumps; Limits to arbitrage (search for similar items in EconPapers)
JEL-codes: C13 G10 G12 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:74:y:2023:i:c:s0927539823000786

DOI: 10.1016/j.jempfin.2023.101420

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