Stop-loss rules and momentum payoffs in cryptocurrencies

Dr. Mohsin Sadaqat, Assistant Professor and Head of the Finance Lab, and Dr. Hilal Anwar Butt, Professor, and Chairperson, Department of Finance, School of Business Studies (SBS), co-authored a research paper titled "Stop-loss rules and momentum payoffs in cryptocurrencies" which was published in Journal of Behavioral and Experimental Finance.

Considering the extreme volatility of cryptocurrencies, this study analyzes the efficacy of stop-loss rules for the momentum strategy across 147 cryptocurrencies from January 2015 to June 2022. We find that the stop-loss momentum strategy provides exceedingly higher returns, the Sharpe ratio, and alphas compared to other benchmark momentum strategies. In prospect theory, the stop-loss rules work as self-control for investors to realize losses, thereby controlling the disposition effect. As a result, investors can earn significantly higher payoffs. Furthermore, our results provide evidence that the stop-loss momentum strategy outperforms other momentum strategies in all market states. Finally, the robustness analyses reaffirm the importance of implementing the stop-loss rules in managing the downside risk of cryptocurrencies.

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