Predictability of Crypto Returns : A Habit-Based Explanation of the Risk Premium

We evaluated the ability of futures market participants’ hedging decisions to predict changes in cryptocurrency returns based on its influence on risk aversion via the risk premium channel. We document that the hedging factor has a significant effect on measures of risk aversion and financial market uncertainty. Notably, the hedging factor displayed a more significant effect on risk aversion relative to measures of uncertainty. The out-of-sample evidence also suggests significant return predictability by the hedging factor. Further, our findings indicate that the hedging factor offers significant but modest gains during “normal” periods and significant but outstanding gains in periods characterized by acute macroeconomic stress