On the (Almost) Stochastic Dominance of Cryptocurrency Factor Portfolios & Implications for Cryptocurrency Asset Pricing

Cryptocurrency returns are highly non-normal, casting doubt on the standard performance metrics. We apply almost stochastic dominance (ASD), which does not require any assumption about the return distribution or degree of risk aversion. From 29 long-short cryptocurrency factor portfolios, we find eight that dominate our four benchmarks. Their returns cannot be fully explained by the three-factor coin model of Liu et al. (2022). So we develop a new three-factor model where momentum is replaced by a mispricing factor based on size and risk-adjusted momentum, which significantly improves pricing performance.

Keywords: Cryptocurrencies, Asset Pricing, Almost Stochastic Dominance, Mispricing

JEL Classification: G11, G12

Suggested Citation: Suggested Citation

Han, Weihao and Newton, David and Platanakis, Emmanouil and Sutcliffe, Charles M. and Ye, Xiaoxia, On the (Almost) Stochastic Dominance of Cryptocurrency Factor Portfolios & Implications for Cryptocurrency Asset Pricing (April 16, 2023). European Financial Management, Forthcoming - SWFA 2021, EFMA 2021, World Finance Conference 2021, ENTFIN Annual Meeting 2022., Available at SSRN: https://ssrn.com/abstract=3857315 or http://dx.doi.org/10.2139/ssrn.3857315