Title: Pricing risk in cryptocurrency market: A (mis)calculated gamble?
Authors: Jan Sila - Univerzita Karlova (Czech Republic) [presenting]
Ladislav Kristoufek - Institute of Information Theory and Automation, Czech Academy of Sciences (Czech Republic)
Abstract: The pricing of risk in the cross-section of cryptocurrency returns is inspected. We present new empirical evidence concerning systemic risk and consider the implications for asset pricing through portfolio sorts. It is shown that, in fact, the risk premium in the market is priced and is positive. Thus, participants pay for the exposure to systemic risk. There is evidence that it has changed in the recent bull run, however the main results this holds. We study a parsimonious model of the return on the market and systemic risk factors from 2015 to 2021. Due to the rapidly changing universe of cryptocurrencies, we take a snapshot of the market at the end of each month and select candidates only from the then relevant coins. At the beginning of the sample period, we demonstrate that, contrary to the standard stocks-related literature, investors seek exposure to the systemic risk, as currencies with higher risk factor loadings earn higher returns. We argue that this has turned around in the recent surge which suggests that the market has matured from a seemingly gambling phase into a risk-rational investment one.