On the (almost) stochastic dominance of cryptocurrency factor portfolios and implications for cryptocurrency asset pricing

Han, W., Newton, D., Platanakis, E., Sutcliffe, C. and Ye, X. (2024) On the (almost) stochastic dominance of cryptocurrency factor portfolios and implications for cryptocurrency asset pricing. European Financial Management, 30 (3). pp. 1125-1164. ISSN 1354-7798 doi: 10.1111/eufm.12431

Abstract/Summary

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.