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Estimating Value at Risk (VAR) on New Assets

As we've covered in various other articles, Value at Risk requires a time series of data points to produce its estimate; and generally speaking, this timeframe is at least one year long. What happens when new assets are created? You may wonder, "How do we estimate VAR on these new assets, given the timeseries does not exist yet?" This is where creating a proxy comes into play.

What is a proxy? In market risk terms, we basically mean a "substitute" timeseries until the actual asset has a full 365 data point history. Each day, we use less of the "proxy" data and more of the "real" data as it becomes known.

This leads to the next logical question: "If we are going to use a substitute timeseries, how do we know which asset's price history to use?" The answer to this question is not so straight forward: It depends! There is a little bit of subjective judgement involved, as no one could possibly "know" for certain. But we use a best judgement approach. If there is a new stablecoin created, we will proxy the asset to an existing stablecoin. At the time of the new coin creation, there will need to be some research done to assess what existing assets that the new asset may be similar to. In the situation that we are unable to determine any previous existing similarities or fits, it is possible to use a beta adjustment on a more well known asset like BTC. For example, for a beta weighting of 1.5; we are saying that we will take BTC's change timeseries and multiply it by the beta weighting to reach the new "shifts". The riskier the asset is perceived, the higher the beta weighting.



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