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Estimating Value at Risk (VAR) on New Assets

by CryptoDataDownload

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.



Notice: Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. The information has been obtained from sources we believe to be reliable; however no guarantee is made or implied with respect to its accuracy, timeliness, or completeness. Author does not own the any crypto currency discussed. The information and content are subject to change without notice. CryptoDataDownload and its affiliates do not provide investment, tax, legal or accounting advice.

This material has been prepared for informational purposes only and is the opinion of the author, and is not intended to provide, and should not be relied on for, investment, tax, legal, accounting advice. You should consult your own investment, tax, legal and accounting advisors before engaging in any transaction. All content published by CryptoDataDownload is not an endorsement whatsoever. CryptoDataDownload was not compensated to submit this article. Please also visit our Privacy policy; disclaimer; and terms and conditions page for further information.
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