Long and short-term Impacts of Regulation in the Cryptocurrency Market

Posted: 15 Apr 2020 Last revised: 1 Jul 2021

See all articles by Ahmad Chokor

Ahmad Chokor

University Grenoble Alpes, Center for Studies and Applied Research in Management (CERAG)

Elise Alfieri

University Grenoble Alpes - Center for Studies and Applied Research in Management (CERAG); University Grenoble Alpes

Date Written: July 2, 2019

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 pre-event period is positive and significant, but it appears not to be significantly different from zero in the post-event period.

Keywords: Regulation, Cryptocurrencies risk, Crypto-Assets Returns, Market Liquidity, Market Efficiency

JEL Classification: F, G

Suggested Citation

Chokor, Ahmad and Alfieri, Elise, Long and short-term Impacts of Regulation in the Cryptocurrency Market (July 2, 2019). Quarterly Review of Economics and Finance, Vol. 81, 2021, Available at SSRN: https://ssrn.com/abstract=3413544

Ahmad Chokor

University Grenoble Alpes, Center for Studies and Applied Research in Management (CERAG) ( email )

150 Rue de la Chimie
Saint-Martin-d'Hères, 38040
France

Elise Alfieri (Contact Author)

University Grenoble Alpes - Center for Studies and Applied Research in Management (CERAG) ( email )

150 Rue de la Chimie
Saint-Martin-d'Hères, 38040
France

University Grenoble Alpes ( email )

151 Rue des Universités
Saint-Martin-d'Hères, 38400
France

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