FINANCIAL RISK METER FOR CRYPTOCURRENCIES AND TAIL RISK NETWORK-BASED PORTFOLIO CONSTRUCTION

Abstract

Cryptocurrencies have emerged as a new asset class. In order to provide a thorough understanding of this new asset class, we study the dependencies in tail risk events within cryptocurrencies, and provide a hedging alternative in this paper. First, we adopt the Financial Risk Meter approach for cryptocurrencies, which is able to identify individual risk characteristics and indicate systemic risk in a network topology. Next, we detect the interdependencies across digital coins and study the spillover effects. Finally, we construct tail event sensitive portfolios and test the performance versus traditional approaches from January 2019 to May 2022.