On the (Almost) Stochastic Dominance of Cryptocurrency Factor Portfolios & Implications for Cryptocurrency Asset Pricing
98 Pages Posted: 1 Jun 2021 Last revised: 6 Jun 2022
Date Written: June 3, 2022
Abstract
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