TMAX Strategy and Lottery-like Demand in the Cryptocurrency and Mutual Funds Market

Abstract

This Master's thesis explores the profitability of the novel TMAX Strategy by Lin et al. (2021) in the cryptocurrency and mutual funds market. In the cryptocurrency market, this investment strategy generates statistically significant average raw losses of 4.38% per week under equal weights and 6.01% under value weights. The research thereby provides empirical evidence of a 'TMAX momentum' effect in the cryptocurrency market. No convincing evidence of a lottery-related bias exhibited by professional money managers can be found; since the early 2000s, no TMAX effect can be observed in the mutual funds market. The study advocates for a mispricing explanation of theTMAX momentum in the cryptocurrency market and shows that a high risk-premium for idiosyncratic skewness, not a differing investor behaviour, explains the diverging results between the stock and cryptocurrency market's TMAX Strategy profitability. The findings in the mutual funds market indicate that the lottery anomaly in the stock market is driven by retail investors, not institutional investors.