Stylized facts, volatility dynamics and risk measures of cryptocurrencies

Abstract

This study explores the stylized facts, volatility clustering, other highly irregular behaviour, and risk measures of cryptocurrencies’ returns. By analysing bitcoin, ripple, and ethereum daily data we establish evidence of strong dependencies among analysed cryptocurrencies. This paper provides new insights about cryptocurrency behaviour and the main measures of risk and detailed comparative analysis with tech-stocks. Comprehensive research on stylized facts confirmed high risk for both cryptocurrencies and tech-stocks with cryptocurrencies being even riskier. Empirical research findings are useful in developing dependence and risk strategies for investment and hedging purposes, especially during more volatile periods in the markets as there was confirmed existence of volatility clusters when high volatility periods are followed by low volatility periods. Sensitivity analysis and measures of Value-at-Risk (VaR) and Expected Shortfall (ES) show the amount of losses investors can expect in the worst case scenario. Our results confirm the existence of predictability, volatility clustering, and possibilities for arbitrage opportunities. Findings could be beneficial for investors and policymakers as well as for scientific purposes as findings give us a better understanding of the behaviour of cryptocurrencies.

Keywords

• cryptocurrency
• risk measures
• volatility clustering
• stylized facts
• value-at-risk
• expected shortfall