Momentum effect in decentralized finance cryptocurrency market
No Thumbnail Available
URL
Journal Title
Journal ISSN
Volume Title
School of Business |
Master's thesis
Authors
Date
2023
Department
Major/Subject
Mcode
Degree programme
Finance
Language
en
Pages
47
Series
Abstract
The purpose of this thesis is to study the momentum effect in decentralized finance cryptocurrency market. The momentum effect has been observed around the world in various financial markets including stocks, bonds, currencies, and lately also centralized cryptocurrency market. Cryptocurrencies have emerged as a new asset class gaining widespread attention in recent years from investors, innovators, and policymakers. Decentralized finance is a rapidly growing sector in the cryptocurrency space and offers a new paradigm for financial services. The key characteristic of decentralized finance is its ability to operate without intermediaries, such as traditional financial institutions, and rely instead on smart contracts, self-executing computer programs with the terms of the application written into code. I find that the momentum effect exists in the decentralized finance market and both long-only and long-short strategies formed from the top quintile and top and bottom quintile of momentum portfolios, respectively, have statistically significant positive returns when rebalanced weekly and the ranking period of the portfolio is up to eight and six weeks, respectively. Furthermore, the magnitude of the momentum effect is stronger the shorter the ranking period is and reaches its peak quicker than in the centralized cryptocurrency market. The excess returns generated by the momentum effect cannot be explained when controlled with the market factor and liquidity factor, formed from liquidity available on decentralized exchanges.Description
Thesis advisor
Puttonen, VesaKeywords
decentralized finance, momentum effect, cryptocurrencies, asset pricing, decentralized exchanges