0
$\begingroup$

In active asset management industry, a common approach to Test whether my Strategy Provides significant alpha is to Regress Portfolio Returns on Fama French 3 (or 5 factors) and check whether the alpha is significant.

I Developed a Strategy for cryptos wirh significant alpha at the 5% level when regressed on Fama French 3 factor loadings, i am just wondering is that test 'fair'? Can i keep the results or am i supposed to test it against some 'cryptro factors'? There arent many which are as established as the Fama French ones, on the other hand i definetely need some statistical validation as it is for some scientific paper. The same problem of course arises for all other asset classes such as bonds too.

$\endgroup$
0
$\begingroup$

The alpha you got makes absolutely sense but compared to the Fama French market, i.e. stock market. It does not take into consideration the characteristics of the crypto market (return, variance, skew, etc.). Therefore, I would build another fair value model based on crypto market.

$\endgroup$
  • $\begingroup$ How would you do that? I thank there hasnt been much (academic) Research regarding crypto factors. So I might want to test the model against the simple crypto market Portfolio at least. Could I use the top 100 cryptos weighted by their market cap as a Proxy for the crypto market and than Regress my Portfolio Returns on the market? $\endgroup$ – MANGo 92 Jul 1 at 12:08
  • $\begingroup$ Yes, makes sense as long as you believe that universe represents the market/systematic risk and is investable (i.e. liquid enough and does not require any extra ability of a manager). However, from my limited understanding of crypto market, it may be the case that the single currencies correlate heavily to BTC, thus I would suggest to consider mean-variance optimized weights instead of market ones (so to consider correlations to BTC) $\endgroup$ – Vitomir Jul 1 at 12:37

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.