How Common are Return Factors in Cryptocurrencies and Equities?

58 Pages Posted: 28 Apr 2021 Last revised: 15 Sep 2021

See all articles by Guo Feng

Guo Feng

Southern University of Science and Technology

Yulong Sun

University of Science and Technology of China (USTC)

Date Written: April 21, 2021

Abstract

Finance research contributes to finding factors to explain the cross-sectional expected equity and cryptocurrency returns. In this paper, we implement the statistical methods to evaluate the common factor structure of these two markets and aim to identify the possible common factors across two markets. By considering the comprehensive dataset covering cryptocurrencies and the U.S. equity universe, we find that there are no common pervasive factors that govern the returns for both cryptocurrencies and equities before 2019, but there arises one common factor post-2020. The identified common factor is significantly related to the standard equity factors but not the crypto factors, which suggests that equity factors can help explain the common variations in returns across equities and cryptocurrencies. The documented pattern is robust across different U.S. equity market classifications, return specifications, and implemented statistical methods. Moreover, we find this pattern holds at the international equity market level. Our results point to the arising of common factors driving the returns on these two markets. Specifically, it's the equity factors that contribute to explaining the cross-sectional cryptocurrency returns recently.

Keywords: Asset pricing; Cryptocurreny; Common subspace; Equity market; Factor structure

JEL Classification: G1, G10, G12

Suggested Citation

Feng, Guo and Sun, Yulong, How Common are Return Factors in Cryptocurrencies and Equities? (April 21, 2021). Available at SSRN: https://ssrn.com/abstract=3835627 or http://dx.doi.org/10.2139/ssrn.3835627

Guo Feng

Southern University of Science and Technology ( email )

No 1088, xueyuan Rd.
Xili, Nanshan District
Shenzhen, Guangdong 518055
China

Yulong Sun (Contact Author)

University of Science and Technology of China (USTC)

No.96 Jinzhai Road
Hefei, Anhui 230026
China

HOME PAGE: http://sites.google.com/view/yulongsun/

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