Risk Analysis of Cryptocurrency
International Journal of Cryptocurrency Research, Forthcoming
48 Pages Posted: 20 Sep 2021 Last revised: 20 Dec 2021
Date Written: September 15, 2021
We compare the explainability of cryptocurrency returns from macro and microeconomic risk factors during stressed and normal market environments, in particular, analyzing the effects of the COVID-19 pandemic to cryptocurrency return explainability. We find that risk-premiums are encapsulated within cryptocurrency-specific market factors in both stressed and normal market conditions. Furthermore, cryptocurrency factors, particularly relating to liquidity, momentum, and counterparty risk, showed evidence of providing stronger predictability of cryptocurrency returns during the COVID-19 pandemic compared to pre-pandemic levels. We find that during the stressed market environment, Fama-French 5 factors continue to provide low explainability to cryptocurrency returns.
Keywords: Cryptocurrency, Liquidity, Momentum, Risk Analysis, Factor Model, PCA
JEL Classification: 25 C, 308 P
Suggested Citation: Suggested Citation