New Risk Management Findings from University of the Free State Described (The Generalised Pareto Distribution Model Approach to Comparing Extreme Risk in the Exchange Rate Risk of BitCoin/US Dollar and South African Rand/US Dollar Returns): Insurance – Risk Management

Insurance Daily News

2023 JUL 06 (NewsRx) -- By a News Reporter-Staff News Editor at Insurance Daily News -- New research on risk management is the subject of a new report. According to news reporting from Bloemfontein, South Africa, by NewsRx journalists, research stated, “Cryptocurrencies are said to be very risky, and so are the currencies of emerging economies, including the South African rand. The steady rise in the movement of South Africans’ investments between the rand and BitCoin warrants an investigation as to which of the two currencies is riskier.”

Our news correspondents obtained a quote from the research from University of the Free State: “In this paper, the Generalised Pareto Distribution (GPD) model is employed to estimate the Value at Risk (VaR) and the Expected Shortfall (ES) for the two exchange rates, BitCoin/US dollar (BitCoin) and the South African rand/US dollar (ZAR/USD). The estimated risk measures are used to compare the riskiness of the two exchange rates. The Maximum Likelihood Estimation (MLE) method is used to find the optimal parameters of the GPD model. The higher extreme value index estimate associated with the BTC/USD when compared with the ZAR/USD estimate, suggests that the BTC/USD is riskier than the ZAR/USD. The computed VaR estimates for losses of $0.07, $0.09, and $0.16 per dollar invested in the BTC/USD at 90%, 95%, and 99% compared to the ZAR/USD’s $0.02, $0.02, and $0.03 at the respective levels of significance, confirm that BitCoin is riskier than the rand. The ES (average losses) of $0.11, $0.13, and $0.21 per dollar invested in the BTC/USD at 90%, 95%, and 99% compared to the ZAR/USD’s $0.02, $0.02, and $0.03 at the respective levels of significance further confirm the higher risk associated with BitCoin. Model adequacy is confirmed using the Kupiec test procedure.”

According to the news reporters, the research concluded: “These findings are helpful to risk managers when making adequate risk-based capital requirements more rational between the two currencies. The argument is for more capital requirements for BitCoin than for the South African rand.”

For more information on this research see: The Generalised Pareto Distribution Model Approach to Comparing Extreme Risk in the Exchange Rate Risk of BitCoin/US Dollar and South African Rand/US Dollar Returns. Risks, 2023,11(100):100. (Risks - http://www.mdpi.com/journal/risks). The publisher for Risks is MDPI AG.

A free version of this journal article is available at https://doi.org/10.3390/risks11060100.

Our news editors report that more information may be obtained by contacting Thabani Ndlovu, Department of Mathematical Statistics and Actuarial Science, University of the Free State, Bloemfontein 9300, South Africa. Additional authors for this research include Delson Chikobvu.