Cryptocurrency returns and consumption-based asset pricing

Abstract

ABSTRACT This paper examines whether the cross-section of cryptocurrency returns is captured by risk factors based on consumption-based asset pricing. It is an imperative task for financial economists to find the fundamental risk behind characteristic-based cryptocurrency factors in order to economically understand cryptocurrency. To address the data availability issue in the analysis of cryptocurrency, we employ mixed data sampling (MIDAS) regression to check the relation between the principal component analysis (PCA) factors in cryptocurrency returns and the factors in the consumption capital asset pricing models (CCAPMs) and intertemporal capital asset pricing models (ICAPMs). We establish significant links between them, which in turn implies that cryptocurrency returns are investors’ compensation for bearing consumption risk, conditional consumption risk, and intertemporal consumption risk. This finding underscores that cryptocurrency returns are the manifestation of macroeconomic equilibrium derived from investors’ utility maximization.