Cross-cryptocurrency return predictability

• Main Authors: GUO, Li, SANG, Bo, Jun TU, WANG, Yu
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2021
• Subjects: Cryptocurrency; return predictability; information spillover; adaptive LASSO; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/6901; https://ink.library.smu.edu.sg/context/lkcsb_research/article/7900/viewcontent/SSRN_id3974583.pdf
• Institution: Singapore Management University

Using the minute-frequency data on Binance, we find strong evidence of cross-cryptocurrency return predictability. The lagged returns of other cryptocurrencies serve as significant predictors of focal cryptocurrencies up to ten minutes, in line with slow information diffusion. The results are robust across various methods, including the adaptive LASSO and principal component analysis. Furthermore, a long-short portfolio formed on the past returns of cryptocurrencies can generate a daily return of 2.16% out-of-sample after accounting for transaction costs, indicating sizable economic value of cross-cryptocurrency return predictability.