The risk analysis of major cryptocurrencies: Value-at-risk and Expected shortfall approaches

Fang, Jun (2022) The risk analysis of major cryptocurrencies: Value-at-risk and Expected shortfall approaches. [Dissertation (University of Nottingham only)] (Unpublished)

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Purpose: The aim of this paper is to examine the Value-at-Risk (VaR) and Expected Shortfall (ES) of major selected cryptocurrencies through Historical simulation, parameter simulation, and Monte Carlo simulation, and compare with S&P500 Index. In addition, this paper also aims to provide some solid advice to existing or prospective investors in the cryptocurrency market through empirical results.

Design/methodology/approach: In this paper, two risk metric measures are employed to measure the market risk of cryptocurrencies, which are VaR and ES respectively. There are six alternative methods of computation implemented for VaR and ES, which are Historical Simulation, Age-weighted Historical Simulation, Hull-White Historical simulation, with volatility in the normal and non-normal distribution of parameter simulation, and Monte Carlo simulation.

Finding: Both VaR and ES provide a good description of cryptocurrency exposures, and for the stablecoin USDT, HS, and age-weighted HS better predict and describe its movements; among the selected cryptocurrencies, excluding stablecoins, Bitcoin is the safer and less risky cryptocurrency in comparison; based on the analysis of volatility in combination with one-day exposures, both XRP and ADA have the highest volatility and exposures, even up to six times the S&P 500 indicator; there is a high correlation between cryptocurrencies, but not with the stock market.

Practical Implication: There is a significant level of risk associated with cryptocurrencies and investments in cryptocurrencies also have greater exposure to risk compared to the general equity market. Apart from the most stable, USDT, Bitcoin still represents the most stable and least volatile cryptocurrency; XRP and ADA have the greatest exposure, and investors need to be cautious.

Value: This article focuses on comparing the risk differences between the cryptocurrency market and the stock market to remind investors in cryptocurrencies to be cautious about their exposure to cryptocurrencies, using the most popular existing cryptocurrencies as the subject of study, and providing some advice and guidance to a significant number of investors.

Item Type: Dissertation (University of Nottingham only)
Schools/Departments: University of Nottingham, UK > Faculty of Social Sciences > Nottingham University Business School
Depositing User: FANG, Jun
Date Deposited: 25 Apr 2023 14:17
Last Modified: 25 Apr 2023 15:16

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