Extreme Correlation in Cryptocurrency Markets

Document Type

Working Paper

Source of Publication

SSRN Electronic Journal

Publication Date

1-1-2018

Abstract

In this paper, we study the contemporaneous tail dependence structure in a pairwise comparison of the ten largest cryptocurrencies, namely Bitcoin, Dash, Dogecoin, Ethereum, Litecoin, Monero, Namecoin, Novacoin, Peercoin, and Ripple. We apply multivariate extreme value theory and we estimate a bias-corrected extreme correlation coefficient. Our findings reveal clear patterns of significantly high bivariate dependency in the distribution tails of some of the most basic and widespread cryptocurrencies, primarily over various downside constraints. This means that extreme correlation is not related to cryptocurrency market volatility per se, but to the trend of the cryptocurrency market. Therefore, extreme correlation increases in bear markets, but not in bull markets for these pairs. Interestingly, there is also a significant number of pairs which exhibit a weak level of dependency in distribution tails.

ISSN

1556-5068

Publisher

Elsevier BV

Disciplines

Business

Keywords

Bitcoin, Cryptocurrencies, Extremes, Tail dependence, Downside risk

Indexed in Scopus

no

Open Access

yes

Open Access Type

Green: A manuscript of this publication is openly available in a repository

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