Conditional Tail-Risk in Cryptocurrency Markets
37 Pages Posted: 18 Apr 2018 Last revised: 25 Nov 2018
Date Written: August 31, 2018
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: Suggested Citation