Skewness risk and the cross-section of cryptocurrency returns

Yakun Liu and Yan Chen

International Review of Financial Analysis, 2024, vol. 96, issue PA

Abstract: This paper investigates whether investors can achieve higher returns by holding cryptocurrencies with lower asymmetry risk. First, using a non-parametric bootstrap resampling method, we found that cryptocurrencies with larger market capitalizations exhibit more left-skewed performance, while those with smaller market capitalizations display more right-skewed performance. This finding is consistent with the results of Jiang et al. (2020) in the stock market. Second, both portfolio-level analyses and cross-sectional regressions at the cryptocurrency level reveal a negative cross-sectional relationship between asymmetry risk and future returns in the cryptocurrency market. Additionally, our findings indicate that skewness in the cryptocurrency market is driven by idiosyncratic risk rather than systematic risk. This contrasts with Langlois (2020), who found that systematic skewness risk outweighs idiosyncratic risk in the stock market. Finally, in addition to the risk-return tradeoff theory, the limits-to-arbitrage theory also provides explanatory insight into these results. Collectively, our findings underscore the significant role of asymmetry risk in determining cryptocurrency prices.

Keywords: Cryptocurrency; Asymmetry risk; Return predictability (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:96:y:2024:i:pa:s1057521924005581

DOI: 10.1016/j.irfa.2024.103626

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