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Pricing DeFi tokens with the Fama-French 3 Factor Model

Author

Listed:
  • Florentina Șoiman

    (CASC - Calcul Algébrique et Symbolique, Sécurité, Systèmes Complexes, Codes et Cryptologie - LJK - Laboratoire Jean Kuntzmann - Inria - Institut National de Recherche en Informatique et en Automatique - CNRS - Centre National de la Recherche Scientifique - UGA - Université Grenoble Alpes - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - UGA - Université Grenoble Alpes, CERAG - Centre d'études et de recherches appliquées à la gestion - UGA - Université Grenoble Alpes)

  • Mathis Mourey

    (CERAG - Centre d'études et de recherches appliquées à la gestion - UGA - Université Grenoble Alpes, The Hague University of Applied Sciences)

Abstract

This study examines the effectiveness of a Fama-French 3 Factors model in explaining DeFi tokens returns. We compute factors based on DeFi data. Notably, we propose the TVL-to-Market ratio as a replacement for the Book-to-Market ratio. Surprisingly, expected returns are negatively related to the size factor, indicating that larger DeFi tokens yield more returns than smaller tokens. Furthermore, we show that once accounting for cross-sectional correlations, no risk factors are significantly priced by the market. This result suggests that DeFi tokens returns cannot be explained by the traditional asset pricing models developed for the stock market. Our findings emphasize the importance of using technological variables, such as network variables, in pricing Blockchain-based assets.

Suggested Citation

  • Florentina Șoiman & Mathis Mourey, 2024. "Pricing DeFi tokens with the Fama-French 3 Factor Model," Working Papers hal-04507930, HAL.
    • Handle: RePEc:hal:wpaper:hal-04507930
    Note: View the original document on HAL open archive server: https://hal.science/hal-04507930
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