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Jointly forecasting the value-at-risk and expected shortfall of Bitcoin with a regime-switching CAViaR model

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  • Gao, Lingbo
  • Ye, Wuyi
  • Guo, Ranran

Abstract

We explore the dynamic tail risk in the Bitcoin market by jointly estimating value-at-risk (VaR) and expected shortfall (ES) using the conditional autoregressive value-at-risk (CAViaR) model. To enable more accurate measurement, we construct a Markov regime-switching (MS) model in which the time-varying transition probability is driven by the information contained in asset price bubbles. This is motivated by prior evidence that bubbles are a key indicator of the economic cycle and contain important information on systemic risk. Using daily Bitcoin data from 2013 to 2021, the results provide strong evidence of a form of regime change in Bitcoin’s VaR and ES. Furthermore, the bubble index has a significant impact on tail risk and improves the model’s ability to estimate and predict VaR and ES.

Suggested Citation

  • Gao, Lingbo & Ye, Wuyi & Guo, Ranran, 2022. "Jointly forecasting the value-at-risk and expected shortfall of Bitcoin with a regime-switching CAViaR model," Finance Research Letters, Elsevier, vol. 48(C).
    • Handle: RePEc:eee:finlet:v:48:y:2022:i:c:s1544612322001258
    DOI: 10.1016/j.frl.2022.102826
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    Cited by:

    1. Jalan, Akanksha & Matkovskyy, Roman, 2023. "Systemic risks in the cryptocurrency market: Evidence from the FTX collapse," Finance Research Letters, Elsevier, vol. 53(C).
    2. Zongwu Cai & Ying Fang & Dingshi Tian, 2024. "CAViaR Model Selection Via Adaptive Lasso," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 202403, University of Kansas, Department of Economics, revised Jan 2024.
    3. Pawe{l} Sakowski & Rafa{l} Sieradzki & Robert 'Slepaczuk, 2023. "Systemic risk indicator based on implied and realized volatility," Papers 2307.05719, arXiv.org.
    4. Zaevski, Tsvetelin S. & Nedeltchev, Dragomir C., 2023. "From BASEL III to BASEL IV and beyond: Expected shortfall and expectile risk measures," International Review of Financial Analysis, Elsevier, vol. 87(C).
    5. Paweł Sakowski & Rafał Sieradzki & Robert Ślepaczuk, 2023. "The systemic risk approach based on implied and realized volatility," Working Papers 2023-07, Faculty of Economic Sciences, University of Warsaw.
    6. Jiang, Kunliang & Ye, Wuyi, 2022. "Does the asymmetric dependence volatility affect risk spillovers between the crude oil market and BRICS stock markets?," Economic Modelling, Elsevier, vol. 117(C).

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    More about this item

    Keywords

    CAViaR; Bitcoin; Bubble index; Markov regime-switching models;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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