A multivariate approach for the simultaneous modelling of market risk and credit risk for cryptocurrencies

Dean Fantazzini and Stephan Zimin ()
Additional contact information
Stephan Zimin: Higher School of Economics

Economia e Politica Industriale: Journal of Industrial and Business Economics, 2020, vol. 47, issue 1, No 2, 19-69

Abstract: Abstract This paper proposes a set of models which can be used to estimate the market risk for a portfolio of crypto-currencies, and simultaneously to estimate also their credit risk using the Zero Price Probability (ZPP) model by Fantazzini et al. (Comput Econ 31(2):161–180, 2008), which is a methodology to compute the probabilities of default using only market prices. For this purpose, both univariate and multivariate models with different specifications are employed. Two special cases of the ZPP with closed-form formulas in case of normally distributed errors are also developed using recent results from barrier option theory. A backtesting exercise using two datasets of 5 and 15 coins for market risk forecasting and a dataset of 42 coins for credit risk forecasting was performed. The Value-at-Risk and the Expected Shortfall for single coins and for an equally weighted portfolio were calculated and evaluated with several tests. The ZPP approach was used for the estimation of the probability of default/death of the single coins and compared to classical credit scoring models (logit and probit) and to a machine learning algorithm (Random Forest). Our results reveal the superiority of the t-copula/skewed-t GARCH model for market risk, and the ZPP-based models for credit risk.

Keywords: Cryptocurrencies; Market risk; Credit risk; ZPP (search for similar items in EconPapers)
JEL-codes: C32 C51 C53 C58 G12 G17 G32 G33 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Downloads: (external link)
http://link.springer.com/10.1007/s40812-019-00136-8 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
Working Paper: A multivariate approach for the simultaneous modelling of market risk and credit risk for cryptocurrencies (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:epolin:v:47:y:2020:i:1:d:10.1007_s40812-019-00136-8

Ordering information: This journal article can be ordered from
http://www.springer.com/economics/journal/40812

DOI: 10.1007/s40812-019-00136-8

Access Statistics for this article

Economia e Politica Industriale: Journal of Industrial and Business Economics is currently edited by C. Cambini, M.G. Colombo, L. Piscitello, L. Rondi and A. Zanfei

More articles in Economia e Politica Industriale: Journal of Industrial and Business Economics from Springer, Associazione Amici di Economia e Politica Industriale
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().