Dynamic Network Perspective of Cryptocurrencies

IRTG 1792 Discussion Paper 2019-009

54 Pages Posted: 31 Aug 2020

See all articles by Li Guo

Li Guo

Fudan University - School of Economics; Shanghai Institute of International Finance and Economics

Yubo Tao

University of Macau - Department of Economics; University of Macau - Asia-Pacific Academy of Economics and Management

Wolfgang Karl Härdle

Blockchain Research Center Humboldt-Universität zu Berlin; Charles University; National Yang Ming Chiao Tung University; Asian Competitiveness Institute

Date Written: March 23, 2019

Abstract

Cryptocurrencies are becoming an attractive asset class and are the focus of recent quantitative research. The joint dynamics of the cryptocurrency market yields information on network risk. Utilizing the adaptive LASSO approach, we build a dynamic network of cryptocurrencies and model the latent communities with a dynamic stochastic block-model. We develop a dynamic co-variate-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.

Keywords: Community Detection, Dynamic Stochastic Block-model, Spectral Clustering, Node Co-variate, Return Predictability, Portfolio Management

JEL Classification: C00

Suggested Citation

Guo, Li and Tao, Yubo and Härdle, Wolfgang Karl, Dynamic Network Perspective of Cryptocurrencies (March 23, 2019). IRTG 1792 Discussion Paper 2019-009, Available at SSRN: https://ssrn.com/abstract=3658122

Li Guo

Fudan University - School of Economics ( email )

600 GuoQuan Road
Shanghai, 200433
China

Shanghai Institute of International Finance and Economics ( email )

777 Guoding Rd
Wu Jiao Chang, Yangpu District
Shanghai, Shanghai 200017
China

Yubo Tao

University of Macau - Department of Economics ( email )

Avenida da Universidade
Taipa
Macao SAR, 999078
China

HOME PAGE: http://https://sites.google.com/site/ybtao1990/home

University of Macau - Asia-Pacific Academy of Economics and Management ( email )

Avenida da Universidade
Taipa
Macao SAR, 999078
China

Wolfgang Karl Härdle (Contact Author)

Blockchain Research Center Humboldt-Universität zu Berlin ( email )

Unter den Linden 6
Berlin, D-10099
Germany

Charles University ( email )

Celetná 13
Dept Math Physics
Praha 1, 116 36
Czech Republic

National Yang Ming Chiao Tung University ( email )

No. 1001, Daxue Rd. East Dist.
Hsinchu City 300093
Taiwan

Asian Competitiveness Institute ( email )

Singapore

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
78
Abstract Views
439
Rank
559,655
PlumX Metrics