Vulnerability-CoVaR: Investigating the Crypto-market

TL;DR

This paper introduces Vulnerability-CoVaR, an extension of CoVaR that assesses systemic risk in the crypto market using copulas, revealing how distress in one cryptocurrency impacts others and capturing domino effects more effectively.

Contribution

The paper develops Vulnerability-CoVaR, a novel systemic risk measure that relaxes normality assumptions and improves detection of contagion effects in cryptocurrency markets.

Findings

Litecoin significantly impacts Bitcoin during distress.

Cryptocurrencies are mutually affected during joint distress events.

VCoVaR outperforms other CoVaR extensions in capturing domino effects.

Abstract

This paper proposes an important extension to Conditional Value-at-Risk (CoVaR), the popular systemic risk measure, and investigates its properties on the cryptocurrency market. The proposed Vulnerability-CoVaR (VCoVaR) is defined as the Value-at-Risk (VaR) of a financial system or institution, given that at least one other institution is equal or below its VaR. The VCoVaR relaxes normality assumptions and is estimated via copula. While important theoretical findings of the measure are detailed, the empirical study analyzes how different distressing events of the cryptocurrencies impact the risk level of each other. The results show that Litecoin displays the largest impact on Bitcoin and that each cryptocurrency is significantly affected if an event of joint distress among the remaining market participants occurs. The VCoVaR is shown to capture domino effects better than other CoVaR extensions.