Connectedness between cryptocurrencies and foreign exchange markets: Implication for risk management

This paper examines the connectedness between cryptocurrencies and major fiat currencies in a multivariate framework using vine copulas. One of the advantages of this method is the flexibility in the choice of distributions used to model complex dependencies. The results show that the dependence, measured conditionally or unconditionally, is positive and higher for the pairs of the same market than those across markets. Moreover, a low significant dependency is found between cryptocurrencies and the main conventional currencies. Based on the Value-at-Risk (VaR) and expected shortfall (ES) analyses, vine copulas produce accurate risk measures by adding cryptocurrencies to a portfolio of fiat currencies. (C) 2020 Elsevier B.V. All rights reserved.

Automated summary

The study finds that there is a positive dependence between cryptocurrencies and major fiat currencies, with higher dependency observed within the same market pairs compared to across markets. Vine copulas are effective in accurately assessing the risk levels of adding cryptocurrencies to a portfolio of fiat currencies.