Long and short-term impacts of regulation in the cryptocurrency market

Ahmad Chokor () and Élise Alfieri ()
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Ahmad Chokor: CERAG - Centre d'études et de recherches appliquées à la gestion - UGA - Université Grenoble Alpes
Élise Alfieri: IRG - Institut de Recherche en Gestion - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12 - Université Gustave Eiffel

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Abstract: Since cryptocurrencies were first created, the related markets have been known for their fluctuations, whether in terms of high volatility or illiquidity. Partially for those reasons, public authorities and regulators around the world have frequently attempted to regulate those markets. We aim in our study to examine whether cryptocurrency traders perceive market regulation in a beneficial way. Using an event study methodology for daily data covering the 2015-2019 period, we assess how regulatory news and events have affected returns in cryptocurrency markets. We further assess whether financial cryptocurrency characteristics and in particular their liquidity can explain cross-sectional variations in cryptocurrency return reactions. The results suggest that events that increase the probability of regulation adoption are associated with negative abnormal returns for the cryptocurrencies concerned. We also find that the magnitude of the return reactions is not the same across all the cryptocurrencies in our sample. We show that investors reacted less negatively for the most illiquid cryptocurrencies and for those that incurred more information asymmetry risk. Finally, we analyze a longer-term effect of regulatory events by studying the performance of cryptocurrencies. The risk-adjusted return in the preevent period is positive and significant, but it appears not to be significantly different from zero in the post-event period.

Keywords: Regulation; Cryptocurrency; risk; Cryptocurrency; return; Market; liquidity; Market; efficiency (search for similar items in EconPapers)
Date: 2021-08
Note: View the original document on HAL open archive server: https://hal.science/hal-03275473v1
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Citations: View citations in EconPapers (17)

Published in Quarterly Review of Economics and Finance, 2021, 81, pp.157-173. ⟨10.1016/j.qref.2021.05.005⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03275473

DOI: 10.1016/j.qref.2021.05.005

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