Dynamic Network Perspective of Cryptocurrencies
Speaker(s)Wolfgang Härdle (Humbolt Universtät zu Berlin, Germany)
LocationErasmus University, Polak Building, Room 1-08
Date and time
October 24, 2019
16:00 - 17:30
Cryptocurrencies are becoming an attractive asset class and are the focus of recent quantitative research. The joint dynamics of the cryptocurrency market yields infor-mation on network risk. Utilizing the adaptive LASSO approach, we build a dynamic network of cryptocurrencies and model the latent communities with a dynamic stochas-tic blockmodel. We develop a dynamic covariate-assisted spectral clustering method to uniformly estimate the latent group membership of cryptocurrencies consistently. We show that return inter-predictability and crypto characteristics, including hashing algorithms and proof types, jointly determine the crypto market segmentation. Based on this classiﬁcation result, it is natural to employ eigenvector centrality to identify a cryptocurrency’s idiosyncratic risk. An asset pricing analysis ﬁnds that a cross-sectional portfolio with a higher centrality earns a higher risk premium. Further tests conﬁrm that centrality serves as a risk factor well and delivers valuable information content on cryptocurrency markets.
Co-authors: Li Guo and Yubo Tao