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The Cross-Section of Cryptocurrency Returns

Last Updated on 10 February, 2024 by Rejaul Karim

The Cross-Section of Cryptocurrency Returns” authored by Nicola Borri and Kirill Shakhnov delves into the intricate dynamics of cryptocurrency pricing across various exchanges and currencies.

With bitcoin prices varying across international exchanges and against diverse currencies, the existing literature commonly attributes such divergences to market frictions and segmentation. However, this paper offers a fresh risk-based perspective, shedding light on how price differences may be tied to underlying risks.

By examining a sample encompassing reputable exchanges and factoring in transaction costs and trade limitations, the study unravels the association between risk and price differentials in the cryptocurrency market.

Through this innovative approach, the authors provide valuable insights into the impact of aggregate liquidity and investor sentiment on bitcoin prices, enhancing our understanding of cryptocurrency returns and liquidity dynamics.

Abstract Of Paper

At a given point in time, bitcoin prices are different on exchanges located in different countries, or against different currencies. While existing literature attributes the largest price differences to frictions, like market segmentation, trading platforms advertize how to execute trades based on this information. We provide a novel risk-based explanation of these price differences for a sample containing the most reputable exchanges and after accounting for all transaction costs and limitations to trade. Bitcoin prices for more “expensive” pairs are riskier because they depreciate more in bad times for cryptocurrency investors, when aggregate liquidity and investor sentiment are lower.

Original paper – Download PDF

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Author

Nicola Borri
LUISS University – Department of Economics and Finance

Kirill Shakhnov
University of Surrey

Conclusion

“The Cross-Section of Cryptocurrency Returns” by Nicola Borri and Kirill Shakhnov offers a significant shift in understanding the intricate nature of cryptocurrency pricing across international exchanges and currencies.

By introducing a risk-based explanation for price differences and considering transaction costs and trade limitations, the study sheds light on the underlying dynamics of bitcoin prices.

The findings reveal that riskier cryptocurrency pairs exhibit greater susceptibility to depreciation in adverse market conditions, where aggregate liquidity and investor sentiment are diminished. This comprehensive exploration illuminates the complexities of cryptocurrency returns, providing valuable insights into the interplay between price differentials, liquidity, and risk.

With its innovative approach, the research sets a solid foundation for future studies and practical applications in the realm of cryptocurrency trading and investment strategies.

Related Reading:

Cryptomarket Discounts

‘Know When to Hodl ’Em, Know When to Fodl ’Em’: An Investigation of Factor Based Investing in the Cryptocurrency Space

FAQ

Q1: What is the focus of the research paper “The Cross-Section of Cryptocurrency Returns” by Nicola Borri and Kirill Shakhnov?

A1: The research paper focuses on understanding the dynamics of cryptocurrency pricing across different exchanges and currencies. Specifically, it delves into the phenomenon where bitcoin prices vary across international exchanges and against diverse currencies. While previous literature attributes such differences to market frictions and segmentation, this paper introduces a novel risk-based perspective to explain how price divergences may be linked to underlying risks in the cryptocurrency market.

Q2: How does the research paper approach the analysis of cryptocurrency pricing differences?

A2: The research paper approaches the analysis of cryptocurrency pricing differences by adopting a risk-based perspective. It examines a sample that includes reputable exchanges and takes into account transaction costs and trade limitations. The study seeks to unravel the association between risk and price differentials in the cryptocurrency market, particularly focusing on bitcoin prices and their variations across different pairs. This innovative approach aims to provide a deeper understanding of the factors influencing cryptocurrency returns and pricing dynamics.

Q3: What is the key finding regarding the relationship between risk and price differentials in the cryptocurrency market?

A3: The key finding of the research is that bitcoin prices for more “expensive” pairs are riskier. The paper suggests that these riskier cryptocurrency pairs exhibit a higher susceptibility to depreciation, especially in adverse market conditions. The study associates this increased risk with periods of lower aggregate liquidity and diminished investor sentiment. In essence, the research identifies a connection between risk factors, such as market conditions and sentiment, and the observed price differentials in the cryptocurrency market.

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