Pricing DeFi tokens with the Fama-French 3 Factor Model

Florentina Șoiman (1, 2) , Mathis Mourey (2, 3)

1 CASC - Calcul Algébrique et Symbolique, Sécurité, Systèmes Complexes, Codes et Cryptologie
2 CERAG - Centre d'études et de recherches appliquées à la gestion
3 The Hague University of Applied Sciences

This study examines the effectiveness of a Fama-French 3 Factors model in explaining DeFi tokens returns. We compute factors based on DeFi data. Notably, we propose the TVL-to-Market ratio as a replacement for the Book-to-Market ratio. Surprisingly, expected returns are negatively related to the size factor, indicating that larger DeFi tokens yield more returns than smaller tokens. Furthermore, we show that once accounting for cross-sectional correlations, no risk factors are significantly priced by the market. This result suggests that DeFi tokens returns cannot be explained by the traditional asset pricing models developed for the stock market. Our findings emphasize the importance of using technological variables, such as network variables, in pricing Blockchain-based assets.

Keywords: DeFi Tokens; Asset-pricing; Fama-French model; Fama-McBeth; Fama-French 3 Factors; Asset pricing; Blockchain

Domains: Cryptography and Security [cs.CR]; Pricing of Securities [q-fin.PR]

Florentina Șoiman, Mathis Mourey. Pricing DeFi tokens with the Fama-French 3 Factor Model. 2024. ⟨hal-04507930⟩