Fundamental Sentiment Index in Cryptocurrencies
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Fundamental Sentiment and Cryptocurrency Risk Premia
Ilias Filippou; My T. Nguyen; Ganesh Viswanath-Natraj
- Florida State University
- Washington University in St. Louis
- ?Washington University in St. Louis - John M. Olin Business School
- ?Washington University in St Louis, John M. Olin Business School
- University of Warwick
- ?Warwick Business School
Strategy in a nutshell
The study constructs cryptocurrency portfolios using Technical (TSI) and Fundamental (FSI) sentiment indices derived from news articles via BERT topic modeling. Cryptocurrencies are sorted into portfolios based on weekly betas to TSI or FSI, with weekly rebalancing. A zero-cost long-short portfolio (LMH FSI) captures performance differences between high- and low-sensitivity cryptocurrencies, isolating the impact of sentiment on returns.
Economic rationale
Sentiment from media coverage provides predictive information for cryptocurrency returns. High fundamental pessimism indicates overvaluation, while high technical pessimism signals higher risk. Investors demand risk premiums for such holdings, making text-based sentiment factors statistically significant drivers of cross-sectional returns.