Stop-loss rules and momentum payoffs in cryptocurrencies

Abstract

Keeping in view the extreme volatility of cryptocurrencies, this study analyzes the efficacy of stop-loss rules for the momentum strategy across 147 cryptocurrencies for the period of January 2015 to June 2022. We find that the stop-loss momentum strategy provides exceedingly higher returns, the Sharpe ratio, and alphas in comparison to other benchmark momentum strategies. In the context of prospect theory, the stop-loss rules work as self-control for investors to realize losses, thereby controlling the disposition effect and as a result, investors can earn significantly higher payoffs. Furthermore, our results provide evidence that the stop-loss momentum strategy outperforms other momentum strategies in all market states. Finally, the robustness analyses reaffirm the importance of implementing the stop-loss rules in managing the downside risk of cryptocurrencies.