Cross-sectional interactions in cryptocurrency returns

Aleksander Mercik, Barbara Będowska-Sójka, Sitara Karim and Adam Zaremba

International Review of Financial Analysis, 2025, vol. 97, issue C

Abstract: We investigate interaction effects in cryptocurrency markets by constructing and evaluating double-sorted portfolios based on 40 different characteristics. Using a dataset of over 500 major coins and tokens from 2017 to 2023, we identify numerous significant interactions. The most pronounced effects arise from the interplay of liquidity, risk, and past return measures. An out-of-sample long-short strategy that selects the top and bottom interactions achieves a Sharpe ratio exceeding 1. However, network graph analysis and additional tests reveal that low liquidity, which raises transaction costs, can dampen trading activity and contribute to the persistence of these anomalies.

Keywords: Cryptocurrency markets; Return predictability; The cross-section of returns; Interactions; Anomalies (search for similar items in EconPapers)
JEL-codes: G11 G12 G17 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:97:y:2025:i:c:s1057521924007415

DOI: 10.1016/j.irfa.2024.103809

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