Role of hedging on crypto returns predictability: A new habit-based explanation

Abstract

We evaluate the ability of risk-averse commercial traders’ net position in futures to predict changes in cryptocurrency returns, which can be useful to cryptocurrency-market-specific measures developed in the behavioral finance literature. Notably, we show that the hedging factor has a statistically significant and economically important effect on the predictability of crypto returns via its moderating effects on the risk-aversion and uncertainty channels. Moreover, the out-of-sample evidence suggests significant return predictability for the hedging factor.