Unravelling cross-sectional patterns in cryptocurrencies: a four-factor asset pricing model

Asgar Ali, Sanshao Peng and Syed Shams

China Accounting and Finance Review, 2025, vol. 27, issue 4, 493-519

Abstract: PurposeThis paper examines the pricing effect of cross-sectional patterns in the cryptocurrency market, aiming to enhance the composition of asset pricing factors for a better explanation of cross-sectional variability in cryptocurrency returns.Design/methodology/approachThe study utilizes data from 1,160 cryptocurrencies spanning over nine years, from January 2014 to December 2022, totalling 468 weeks. We obtain data for all cryptocurrencies using the application programming interface (API) provided by coinmarketcap.com and employ a well-established multifactor asset pricing methodology aimed at proposing an improved composition of cryptocurrency factors.FindingsThe findings of the study uncover a strong size effect, a distinctive reversal effect, and a significant premium for cryptocurrency illiquidity. Contrary to the prevailing views, the observed reversal effect challenges the established momentum effect, while the observed illiquidity premium appears not to be explained by the size effect or other cross-sectional patterns. In response to these insights, the study introduces a novel four-factor asset pricing model, comprising the crypto market factor (CRm-Rf), crypto size factor (CSMB), crypto reversal factor (CLMW) and crypto illiquidity factor (CIHML).Originality/valueThis paper contributes to the literature in three significant ways. Firstly, the comprehensive analysis of the cryptocurrency market from the perspective of empirical asset pricing enriches the available literature on cryptoasset pricing. Moving beyond the identified patterns of crypto market risk, crypto size effect and pervasive momentum effect in the market, our study advances the mostly used three-factor model with the reversal and illiquidity factors. The comparative evaluation of various combinations of three-factor, four-factor and five-factor models demonstrates the superior performance of the proposed four-factor model. Thirdly, the study identified a significant illiquidity premium in the cryptocurrency market.

Keywords: Cryptocurrency; Asset pricing; Factor model; Size; Reversal; Illiquidity (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:cafrpp:cafr-06-2024-0077

DOI: 10.1108/CAFR-06-2024-0077

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