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The pricing of jump and diffusive risks in the cross-section of cryptocurrency returns

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  • Leong, Minhao
  • Kwok, Simon

Abstract

In this study, we investigate the pricing of risks in the cross-section of cryptocurrency returns. In doing so, we decompose total variations into systematic and idiosyncratic components, as well as differentiate jumps from diffusive variations. We show that a hedged portfolio sorted on idiosyncratic diffusive risk yields a weekly return of -1.11%, suggesting the existence of a low idiosyncratic risk anomaly. Subsequently, we examine explanations for this anomaly, and show that limits to arbitrage prevent arbitrageurs from fully correcting the mispricing.

Suggested Citation

  • Leong, Minhao & Kwok, Simon, 2023. "The pricing of jump and diffusive risks in the cross-section of cryptocurrency returns," Journal of Empirical Finance, Elsevier, vol. 74(C).
    • Handle: RePEc:eee:empfin:v:74:y:2023:i:c:s0927539823000786
    DOI: 10.1016/j.jempfin.2023.101420
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    More about this item

    Keywords

    Cryptocurrency asset pricing; Jumps; Limits to arbitrage;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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