A Statistical Risk Assessment of Bitcoin and Its Extreme Tail Behaviour
13 Pages Posted: 10 Nov 2016 Last revised: 23 Dec 2018
Date Written: September 10, 2016
We provide an extreme value analysis of the returns of Bitcoin. A particular focus is on the tail risk characteristics and we will provide an in-depth univariate extreme value analysis. Those properties will be compared to the traditional exchange rates of the G10 currencies versus the US dollar. For investors - especially institutional ones - an understanding of the risk characteristics is of utmost importance. So for bitcoin to become a mainstream investable asset class, studying these properties is necessary. Our findings show that the bitcoin return distribution not only exhibits higher volatility than traditional G10 currencies, but also stronger non-normal characteristics and heavier tails. This has implications for risk management, financial engineering (such as bitcoin derivatives) - both from an investor's as well as from a regulator's point of view. To our knowledge, this is the first detailed study looking at the extreme value behaviour of the cryptocurrency Bitcoin.
Keywords: Bitcoin, digital currencies, extreme value theory, tail events, risk management
JEL Classification: C00, C1, E4, E5, G1, G2, G00
Suggested Citation: Suggested Citation