Cryptocurrency trading and downside risk




Iqbal, Farhat
Zahid, Mamoona
Koutmos, Dimitrios


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Since the debut of cryptocurrencies, particularly Bitcoin, in 2009, cryptocurrency trading has grown in popularity among investors. Relative to other conventional asset classes, cryptocurrencies exhibit high volatility and, consequently, downside risk. While the prospects of high returns are alluring for investors and speculators, the downside risks are important to consider and model. As a result, the profitability of crypto market operations depends on the predictability of price volatility. Predictive models that can successfully explain volatility help to reduce downside risk. In this paper, we investigate the value-at-risk (VaR) forecasts using a variety of volatility models, including conditional autoregressive VaR (CAViaR) and dynamic quantile range (DQR) models, as well as GARCH-type and generalized autoregressive score (GAS) models. We apply these models to five of some of the largest market capitalization cryptocurrencies (Bitcoin, Ethereum, Ripple, Litecoin, and Steller, respectively). The forecasts are evaluated using various backtesting and model confidence set (MCS) techniques. To create the best VaR forecast model, a weighted aggregative technique is used. The findings demonstrate that the quantile-based models using a weighted average method have the best ability to anticipate the negative risks of cryptocurrencies.



cryptocurrencies, downside risk, VaR models, weighted aggregative approach


This research received no external funding.


Attribution 4.0 International


Iqbal, Farhat, Mamoona Zahid, and Dimitrios Koutmos. 2023. Cryptocurrency Trading and Downside Risk. Risks 11: 122. 11070122