ANALYSIS OF RISK-RETURN TRADE-OFF IN CRYPTOCURRENCY MARKETS

Abstract

A rational investor does not only focus on obtaining the maximum return while making the
investment decision, but also tries to calculate the risk dimension of the investment. Risk and return
are in close relationship with each other in the field of finance, just as they are in daily life. In this
study, risk-return analysis was made on the top five cryptocurrencies with high transaction volume;
“BTC, ETH, ADA, XRP, LTC” traded on crypto technology market exchanges. As it is known,
digital currencies contain a lot of speculative movements. In this study, EGARCH-M model, which
allows to measure the statistical connection between risk and return in the asset, which is one of the
variable variance (GARCH) models, was used. Another feature of this model is that it measures
whether there is an asymmetric effect in volatility. In the study, three different time periods are
included: pre-pandemic period, pandemic period and the whole period.
As a result of the analysis, Cardano is the only cryptoasset in which the risk-return interaction was
detected. A significant risk-return trade off, which was not detected before the pandemic period,
emerged for Cardano with the pandemic and continued throughout the entire period.In other analyzed cryptocurrencies; (Bitcoin, Ethereum, Ripple and Litecoin), no significant
relationship was found in terms of risk-return tradeoff.