A comparative nonparametric analysis on crypto currency exchange rate returns

Abstract

Purpose- Cryptocurrencies market have grown considerably since 2008 in terms of number and frequency of transactions, despite their advantages and disadvantages. Therefore cryptocurrency market is addressed frequently by financial and government institutions globally. Cryptocurrencies, which provide advantages in terms of time and costs such as instant transactions and low transfer fees, are seen as an alternative financial asset for investors. Therefore, cryptocurrency holders purposing of investing in its exchange rates are exposed to market risk. The purpose of this study is to compare the effectiveness of cryptocurrency exchange rate returns with respect to each other. Methodology- The relative efficiencies of exchange rate returns are compared with the second order stochastic dominance criterion. As a nonparametric approach Stochastic dominance is used in analyzing the risk of financial return series that do not exhibit a normal distribution. Findings- When the exchange rate returns of five different cryptocurrencies are compared with the second order stochastic dominance criterion, it is determined that there are effective currencies among the cryptocurrency returns in the said period. On the other hand, it is seen that there are currencies that do not have stochastic dominance among the cryptocurrency returns. Conclusion- The results results provide ideas for investors and researchers who want to include cryptocurrencies in their portfolios.