Hedging the extreme risk of cryptocurrency

Kwamie Dunbar and Johnson Owusu-Amoako

The North American Journal of Economics and Finance, 2022, vol. 63, issue C

Abstract: The attractiveness of crypto investments is highlighted by their Sharpe ratios which are generally higher than that of similarly risky equity returns (MRP). However, this remarkable level of performance comes with significant risk. 1-week Value-at-Risk (VaR) losses indicate that cryptos’ potential 1-week losses were far more significant than MRP’s. This study provides new evidence showing that MRP is a meaningful diversifier of crypto risks. We also document that MRP reduces the downside risk of risk-averse investors at exactly the time it is needed, such as during periods of elevated levels of economic uncertainty.

Keywords: Cryptocurrency; Extreme risk; Market risk premium; Down-side risk (search for similar items in EconPapers)
JEL-codes: G12 G32 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:63:y:2022:i:c:s1062940822001486

DOI: 10.1016/j.najef.2022.101813

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