Contagion Risk Measured by Return Among Cryptocurrencies

Abstract

This paper examines the movement of cryptocurrencies’ return based on price. This volatility can spread to others of the same kind. Currently, the more cryptocurrencies are traded in market, the more chances are available for investors. The author wonders whether contagion risk among these cryptocurrencies happens or not in the event of crashing. We also introduce one empirical evidence of the mutual influence on these cryptocurrencies using Copulas approach. The findings show that all pairs have the structure dependence with Kendall-plots, particularly strong left tail dependence with Chi-plots. It also means the existence of contagion risk among these cryptocurrencies. The three methodologies namely Kendall-plots, Chi-plots and Copulas estimation produce consistent results. Therefore, the investors should carefully perform portfolio diversification to avoid contagious phenomenon.