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One Cryptocurrency to Explain Them All? Understanding the Importance of Bitcoin in Cryptocurrency Returns
Author(s) -
Smales Lee Alan
Publication year - 2020
Publication title -
economic papers: a journal of applied economics and policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.245
H-Index - 19
eISSN - 1759-3441
pISSN - 0812-0439
DOI - 10.1111/1759-3441.12282
Subject(s) - cryptocurrency , portfolio , econometrics , economics , sample (material) , set (abstract data type) , principal component analysis , explanatory power , variation (astronomy) , financial economics , monetary economics , computer science , statistics , mathematics , computer security , philosophy , chemistry , physics , epistemology , chromatography , astrophysics , programming language
We utilise principal component analysis to determine whether a (small) set of factors can explain cryptocurrency returns and whether this varies over time. We find that a substantial proportion of cryptocurrency return variation is explained by a single principal component that is highly correlated with bitcoin returns. The explanatory power of this factor is greatest for larger cryptocurrencies and increases markedly in the most recent part of the sample. Our results have implications for investors determining optimal portfolio decisions and for policy‐makers wary of systemic risk.