Abstract
This study investigates the factors of Bitcoin’s tail risk, quantified by Value at Risk (VaR). Extending the conditional autoregressive VaR model proposed by Engle and Manganelli (2004), I examine 30 potential drivers of Bitcoin’s 5% and 1% VaR. For the 5% VaR, quantity variables, such as Bitcoin trading volume and monetary policy rate, were positively significant, but these effects were attenuated when new samples were added. The 5% VaR responds positively to the Internet search index and negatively to the fluctuation of returns on commodity variables and the Chinese stock market index. For the 1% VaR, variables related to the macroeconomy play a key role. The consumer sentiment index exerts a strong positive effect on the 1% VaR. I also find that the 1% VaR has positive relationships with the US economic policy uncertainty index and the fluctuation of returns on the corporate bond index.
Highlights
It has been approximately a decade since the introduction of Bitcoin by Nakamoto (2008), its scope of usage has been rapidly enlarged
One can argue that Bitcoin is another investment asset because investors can hedge the downside risk of their wealth by adjusting the amount of Bitcoin as they have done with other investment assets, such as stocks and
Rapach et al (2010) state that “applied asset pricing models could benefit from the consideration of more complex data-generating processes with more variables.”
Summary
It has been approximately a decade since the introduction of Bitcoin by Nakamoto (2008), its scope of usage has been rapidly enlarged. Whelan (2013) argues that Bitcoin is similar to the currency. According to Whelan (2013), Bitcoin is a currency because it is a globally accepted medium of exchange. Cuthbertson (2015) states that there are more than 100,000 retailers accepting Bitcoin as payment for goods and services. Bitcoin shares many properties with gold, a kind of commodity. Both Bitcoin and gold derive most of their value because they are scarce and costly to extract. This feature enables them to act as a store of value, and they are classified as a commodity. One can argue that Bitcoin is another investment asset because investors can hedge the downside risk of their wealth by adjusting the amount of Bitcoin as they have done with other investment assets, such as stocks and
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