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Hedging the extreme risk of cryptocurrency

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  • Dunbar, Kwamie
  • Owusu-Amoako, Johnson

Abstract

The attractiveness of crypto investments is highlighted by their Sharpe ratios which are generally higher than that of similarly risky equity returns (MRP). However, this remarkable level of performance comes with significant risk. 1-week Value-at-Risk (VaR) losses indicate that cryptos’ potential 1-week losses were far more significant than MRP’s. This study provides new evidence showing that MRP is a meaningful diversifier of crypto risks. We also document that MRP reduces the downside risk of risk-averse investors at exactly the time it is needed, such as during periods of elevated levels of economic uncertainty.

Suggested Citation

  • Dunbar, Kwamie & Owusu-Amoako, Johnson, 2022. "Hedging the extreme risk of cryptocurrency," The North American Journal of Economics and Finance, Elsevier, vol. 63(C).
    • Handle: RePEc:eee:ecofin:v:63:y:2022:i:c:s1062940822001486
    DOI: 10.1016/j.najef.2022.101813
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    Cited by:

    1. Dunbar, Kwamie & Owusu-Amoako, Johnson, 2023. "Predictability of crypto returns: The impact of trading behavior," Journal of Behavioral and Experimental Finance, Elsevier, vol. 39(C).
    2. Fang, Sheng & Cao, Guangxi & Egan, Paul, 2023. "Forecasting and backtesting systemic risk in the cryptocurrency market," Finance Research Letters, Elsevier, vol. 54(C).

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    More about this item

    Keywords

    Cryptocurrency; Extreme risk; Market risk premium; Down-side risk;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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