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Explaining cryptocurrency returns: A prospect theory perspective

Rongxin Chen, Gabriele M. Lepori, Chung-Ching Tai, Ming-Chien Sung

Journal of International Financial Markets, Institutions and Money, Volume: 79, Start page: 101599

Swansea University Author: Rongxin Chen

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DOI (Published version): 10.1016/j.intfin.2022.101599

Abstract

We investigate prospect theory’s ability to explain cryptocurrency returns using data concerning 1,573 cryptocurrencies over the period 2014–2020. In line with the theory’s predictions, we find that cryptocurrencies that are more (less) attractive from a prospect theory perspective earn lower (highe...

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Published in: Journal of International Financial Markets, Institutions and Money
ISSN: 1042-4431 1873-0612
Published: Elsevier BV 2022
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URI: https://cronfa.swan.ac.uk/Record/cronfa64713
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first_indexed 2023-10-18T20:01:09Z
last_indexed 2023-10-18T20:01:09Z
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spelling v2 64713 2023-10-11 Explaining cryptocurrency returns: A prospect theory perspective 594e1b777174ec7a0ddafd29e99f1f4c Rongxin Chen Rongxin Chen true false 2023-10-11 BAF We investigate prospect theory’s ability to explain cryptocurrency returns using data concerning 1,573 cryptocurrencies over the period 2014–2020. In line with the theory’s predictions, we find that cryptocurrencies that are more (less) attractive from a prospect theory perspective earn lower (higher) future returns, suggesting that they tend to be overpriced (underpriced). On average, a one cross-sectional standard-deviation increase in the prospect theory value of a cryptocurrency reduces its next-week return by 0.71% relative to its peers. This effect is stronger among cryptocurrencies that are more difficult to arbitrage, but it is not confined to the micro-cap segment of the market. Journal Article Journal of International Financial Markets, Institutions and Money 79 101599 Elsevier BV 1042-4431 1873-0612 Prospect theory, Behavioural asset pricing, Cryptocurrency, Cross-section of returns 31 7 2022 2022-07-31 10.1016/j.intfin.2022.101599 http://dx.doi.org/10.1016/j.intfin.2022.101599 COLLEGE NANME Accounting and Finance COLLEGE CODE BAF Swansea University 2023-11-08T15:38:07.6021405 2023-10-11T14:32:40.3970172 Faculty of Humanities and Social Sciences School of Management - Accounting and Finance Rongxin Chen 1 Gabriele M. Lepori 2 Chung-Ching Tai 3 Ming-Chien Sung 4
title Explaining cryptocurrency returns: A prospect theory perspective
spellingShingle Explaining cryptocurrency returns: A prospect theory perspective
Rongxin Chen
title_short Explaining cryptocurrency returns: A prospect theory perspective
title_full Explaining cryptocurrency returns: A prospect theory perspective
title_fullStr Explaining cryptocurrency returns: A prospect theory perspective
title_full_unstemmed Explaining cryptocurrency returns: A prospect theory perspective
title_sort Explaining cryptocurrency returns: A prospect theory perspective
author_id_str_mv 594e1b777174ec7a0ddafd29e99f1f4c
author_id_fullname_str_mv 594e1b777174ec7a0ddafd29e99f1f4c_***_Rongxin Chen
author Rongxin Chen
author2 Rongxin Chen
Gabriele M. Lepori
Chung-Ching Tai
Ming-Chien Sung
format Journal article
container_title Journal of International Financial Markets, Institutions and Money
container_volume 79
container_start_page 101599
publishDate 2022
institution Swansea University
issn 1042-4431
1873-0612
doi_str_mv 10.1016/j.intfin.2022.101599
publisher Elsevier BV
college_str Faculty of Humanities and Social Sciences
hierarchytype
hierarchy_top_id facultyofhumanitiesandsocialsciences
hierarchy_top_title Faculty of Humanities and Social Sciences
hierarchy_parent_id facultyofhumanitiesandsocialsciences
hierarchy_parent_title Faculty of Humanities and Social Sciences
department_str School of Management - Accounting and Finance{{{_:::_}}}Faculty of Humanities and Social Sciences{{{_:::_}}}School of Management - Accounting and Finance
url http://dx.doi.org/10.1016/j.intfin.2022.101599
document_store_str 0
active_str 0
description We investigate prospect theory’s ability to explain cryptocurrency returns using data concerning 1,573 cryptocurrencies over the period 2014–2020. In line with the theory’s predictions, we find that cryptocurrencies that are more (less) attractive from a prospect theory perspective earn lower (higher) future returns, suggesting that they tend to be overpriced (underpriced). On average, a one cross-sectional standard-deviation increase in the prospect theory value of a cryptocurrency reduces its next-week return by 0.71% relative to its peers. This effect is stronger among cryptocurrencies that are more difficult to arbitrage, but it is not confined to the micro-cap segment of the market.
published_date 2022-07-31T15:38:11Z
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score 11.013371

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