Abstract
We examine as if the incorporation of the contagion risk, which is found significant in cryptocurrencies, can make the resulting four-factor pricing model offers an improved explanatory power. We estimate contagion measure for the large left-tail events in the idiosyncratic disturbances of cryptocurrencies and then incorporate it into the three-factor pricing model. Using data of 1,967 cryptocurrencies from January 1, 2015 to September 26, 2019, we show that the four-factor pricing model outperforms both the cryptocurrency-CAPM and three-factor models. Our findings are useful to researchers of cryptocurrency anomalies and those applying quantitative strategies in the cryptocurrency market.
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