The Impact of Regulation in the Cryptocurrency Market: An Event Study Assessing Assets’ Returns Reaction
Posted: 15 Apr 2020 Last revised: 9 Dec 2020
Date Written: July 2, 2019
Presented in the 13th International Risk Management Conference 2020
While the empirical evidence is still scant, we attempt in this paper to examine the impact of regulation on the cryptocurrency market. Do cryptocurrency traders perceive regulation in a beneficial or a costly way? Using an event study methodology for daily data covering the period 2015-2019, we assess how regulatory news and events have affected returns in the cryptocurrency market. The results suggest that events that increase the probability of a regulation adoption are associated with a negative abnormal return for concerned cryptocurrencies. We isolate events that consider cryptocurrencies under securities law and find that the reaction is amplified and that there is a negative and more significant relationship. Moreover, we assess whether specific cryptocurrency characteristics and in particular their liqudity explain cross-sectional variations in cryptocurrencies’ return reactions. We find that the magnitude of the returns’ reaction was not the same across all the cryptocurrencies samples. Furthermore, we examine the performance of cryptocurrencies on the long-term using the Sharpe ratio, CAPM, Fama-Frenceh 3-factors model, and Carhart model. After measuring a positive and significant performance in the pre-event period, we find a non-significant performance in the post-event period.
Keywords: Regulation, Cryptocurrencies risk, Crypto-Assets Returns, Market Liquidity, Market Efficiency
JEL Classification: F, G
Suggested Citation: Suggested Citation