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Timeseries: All About the Shifts

Just like the title says: When it comes to timeseries analysis, it is all about the shifts --> The change between the values in the timeseries. For financial products and cryptocurrencies, we compare across percentage % change in the shifts. In the cryptocurrency options and derivatives space, volatility shifts are usually measured in absolute shifts. In our risk education articles that cover Value at Risk, (like how banks calculate value at risk), we use a percentage change between assets.

Differences in Shift Size
The most common shift size is naturally one, as it is the difference between two consecutive periods. The one period shift is commonplace in financial institutions monitoring market risk. What may not be as well known is that these desks also use longer periods of time, like the 10-day shift. The reason being is that 10 days is estimated to be the amount of time necessary to liquidate a holding that may be illiquid. In cryptocurrency markets, it is prudent to begin thinking of holding periods longer than one day. There are a multitude of market conditions that could cause an investor to not be able to liquidate his portfolio in adverse conditions. (Exchanges are notoriously slow, delayed or unavailable in terms of cryptocurrency market distress)

The Magnitude of the Shift
By magnitude, we mean the % change between two periods. Your 10-Day Value at Risk metric is going to be larger than 1 Day Value at Risk metric as shift sizes are larger. It is important to recognize that both of these metrics, while slightly different periods, represent real and adverse market risk conditions to the portfolio under consideration! The Value at Risk model is typically based on a one or two year lookback period; which means that it provides a general representation of risk that was recently seen in the market, and an intuitive understanding of what losses would be if the activity of the last two years were to repeat.



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