Nonlinear relationship between cryptocurrency returns and price sensitivity to market uncertainty

SeungOh Han

Finance Research Letters, 2024, vol. 68, issue C

Abstract: This paper examines the relationship between cryptocurrency returns and price sensitivity to unexpected changes in market uncertainty, as measured by U.S. stock market volatility, from June 2018 to February 2023. Cryptocurrencies with intermediate uncertainty risk earn a risk-adjusted weekly return of 5.73% higher than those with low and high uncertainty risk, after controlling for market, size, reversal, and liquidity factors, demonstrating the non-linearity between cryptocurrency returns and VIX betas. Overpaying for lottery-like cryptocurrencies lowers expected returns, further explaining this nonlinear relationship. The relationship remains robust using (1) two-pass cross-sectional regression, (2) various quantile portfolios, and (3) alternative risk factors.

Keywords: Market uncertainty risk; Stock market volatility; Cryptocurrency pricing; Nonlinear relationship; Cross-sectional tests (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:68:y:2024:i:c:s1544612324010468

DOI: 10.1016/j.frl.2024.106016

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