Conditional Tail-Risk in Cryptocurrency Markets

37 Pages Posted: 18 Apr 2018 Last revised: 25 Nov 2018

See all articles by Nicola Borri

Nicola Borri

LUISS University - Department of Economics and Finance

Date Written: August 31, 2018

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

JEL Classification: G11, G12, F31

Suggested Citation

Borri, Nicola, Conditional Tail-Risk in Cryptocurrency Markets (August 31, 2018). Journal of Empirical Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3162038 or http://dx.doi.org/10.2139/ssrn.3162038

Nicola Borri (Contact Author)

LUISS University - Department of Economics and Finance ( email )

viale Romania, 32
Rome, 00197
Italy

HOME PAGE: http://docenti.luiss.it/borri/

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