The pricing of jump and diffusive risks in the cross-section of cryptocurrency returns

Abstract

In this study, we investigate the pricing of risks in the cross-section of cryptocurrency returns. In doing so, we decompose total variations into systematic and idiosyncratic components, as well as differentiate jumps from diffusive variations. We show that a hedged portfolio sorted on idiosyncratic diffusive risk yields a weekly return of -1.11%, suggesting the existence of a low idiosyncratic risk anomaly. Subsequently, we examine explanations for this anomaly, and show that limits to arbitrage prevent arbitrageurs from fully correcting the mispricing.