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Conditional tail-risk in cryptocurrency markets

Nicola Borri

Journal of Empirical Finance, 2019, vol. 50, issue C, 1-19

Abstract: In this paper we use CoVaR to estimate the conditional tail-risk in the markets for bitcoin, ether, ripple and litecoin and find that these cryptocurrencies are highly exposed to tail-risk within cryptomarkets, while they are not exposed to tail-risk with respect to other global assets, like the U.S. equity market or gold. Although cryptocurrency returns are highly correlated one with the other, we find that idiosyncratic risk can be significantly reduced and that portfolios of cryptocurrencies offer better risk-adjusted and conditional returns than individual cryptocurrencies. These results indicate that portfolios of cryptocurrencies could offer attractive returns and hedging properties when included in investors’ portfolios. However, when we account for liquidity, the share of crypto assets in investors’ optimal portfolio is small.

Keywords: Cryptocurrency; Contagion; CoVaR; Tail-risk (search for similar items in EconPapers)
JEL-codes: G11 G12 F31 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.jempfin.2018.11.002

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Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

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