Authors: Isfenti Sadalia1, Rico Nur Ilham2, Erlina3, Khaira Amalia Fachrudin4, Amlys Syahputra Silalahi5
Year: 2019, Volume 28 No.3 Special Issue
Pages: 8-15
ABSTRACT
We establish that the risk-return tradeoff of cryptocurrencies (Bitcoin, Ripple, and Ethereum) is distinct from those of stocks, currencies, and precious metals. Cryptocurrencies have no exposure to most common stock market and macroeconomic factors or to the returns of currencies and commodities. In contrast, we show that the cryptocurrency returns can be predicted by factors which are specific to cryptocurrency markets – there is a strong time-series momentum effect and proxies for investor attention strongly forecast cryptocurrency returns. We provide an extreme value analysis of the returns of Bitcoin. A particular focus is on the tail risk characteristics and we will provide an in-depth univariate extreme value analysis. Those properties will be compared to the traditional exchange rates of the G10 currencies versus the US dollar. For investors – especially institutional ones – an understanding of the risk characteristics is of utmost importance. So for bitcoin to become a mainstream investable asset class, studying these properties is necessary. Our Endings show that the bitcoin return distribution not only exhibits higher volatility than traditional G10 currencies, but also stronger non-normal characteristics and heavier tails. This has implications for risk management, financial engineering (such as bitcoin derivatives)-both from an investor’s as well as from a regulator’s point of view. To our knowledge, this is the first detailed study looking at the extreme value behaviour of the cryptocurrency Bitcoin.
Keywords : Bitcoin, Risk and Return, Portfolio Management
