Explaining cryptocurrency returns: A prospect theory perspective

Rongxin Chen, Gabriele M. Lepori, Chung-Ching Tai and Ming-Chien Sung

Journal of International Financial Markets, Institutions and Money, 2022, vol. 79, issue C

Abstract: We investigate prospect theory’s ability to explain cryptocurrency returns using data concerning 1,573 cryptocurrencies over the period 2014–2020. In line with the theory’s predictions, we find that cryptocurrencies that are more (less) attractive from a prospect theory perspective earn lower (higher) future returns, suggesting that they tend to be overpriced (underpriced). On average, a one cross-sectional standard-deviation increase in the prospect theory value of a cryptocurrency reduces its next-week return by 0.71% relative to its peers. This effect is stronger among cryptocurrencies that are more difficult to arbitrage, but it is not confined to the micro-cap segment of the market.

Keywords: Prospect theory; Behavioural asset pricing; Cryptocurrency; Cross-section of returns (search for similar items in EconPapers)
JEL-codes: G11 G12 G41 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1042443122000804
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:79:y:2022:i:c:s1042443122000804

DOI: 10.1016/j.intfin.2022.101599

Access Statistics for this article

Journal of International Financial Markets, Institutions and Money is currently edited by I. Mathur and C. J. Neely

More articles in Journal of International Financial Markets, Institutions and Money from Elsevier
Bibliographic data for series maintained by Catherine Liu ().