Factor Structure in Cryptocurrency Returns and Volatility

61 Pages Posted: 30 May 2019 Last revised: 30 Sep 2020

See all articles by Jiatao Liu

Jiatao Liu

Cass Business School

Ian W. Marsh

City University London - Sir John Cass Business School

Paolo Mazza

IESEG School of Management

Mikael Petitjean

Catholic University of Lille - IÉSEG School of Management, Lille Campus; Lille Economie & Management (LEM) UMR 9221; Louvain School of Management (UCL); Catholic University of Louvain (UCL) - Louvain Finance (LFIN)

Date Written: May 16, 2019

Abstract

We use high-frequency tick data to study stylized facts of the return and volatility dynamics of the nine most liquid cryptocurrencies. Factor structures exist in both returns and volatility, but the explanatory power from the common factor is much stronger for volatility. The factor structures do not relate strongly to fundamental economic factors, and Bitcoin – which we propose is a “crypto market factor” – also has only weak explanatory power. We date the bubble in Bitcoin allowing us to split the sample into pre-, bubble and post-bubble regimes. The importance of these different regimes is clear, revealing shifting relationships between the nine cryptocurrencies and Bitcoin. Model-free realized cryptocurrency betas with Bitcoin increase during the bubble and the explained fraction of cryptocurrency variance remains at an elevated level after the bubble collapsed.

Keywords: Cryptocurrency, Factor Structure, Bitcoin Bubble, Realised Volatility

JEL Classification: C38, G12, G13

Suggested Citation

Liu, Jiatao and Marsh, Ian William and Mazza, Paolo and Petitjean, Mikael, Factor Structure in Cryptocurrency Returns and Volatility (May 16, 2019). Available at SSRN: https://ssrn.com/abstract=3389152 or http://dx.doi.org/10.2139/ssrn.3389152

Jiatao Liu (Contact Author)

Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
Great Britain

Ian William Marsh

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 20 7040 5121 (Phone)
+44 20 7040 8881 (Fax)

HOME PAGE: http://www.cass.city.ac.uk/faculty/i.marsh

Paolo Mazza

IESEG School of Management ( email )

3 Rue de la Digue
Office: A321
Lille, 59 59000
France

HOME PAGE: http://https://sites.google.com/site/paolomazzaphd/

Mikael Petitjean

Catholic University of Lille - IÉSEG School of Management, Lille Campus ( email )

3 rue de la Digue
Lille, 59000
France
0032497301266 (Phone)
59000 (Fax)

Lille Economie & Management (LEM) UMR 9221 ( email )

Lille
France

Louvain School of Management (UCL) ( email )

Belgium

Catholic University of Louvain (UCL) - Louvain Finance (LFIN) ( email )

34 Voie du Roman Pays - L1.03.01
Louvain-la-Neuve, 1348
Belgium

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