What are the potential drawbacks of relying on value at risk (VAR) models for cryptocurrency risk assessment?

3 answers

• dolly sharmaJun 12, 2025 · 8 months ago
  Value at risk (VAR) models can be a useful tool for assessing the risk of cryptocurrencies, but they do have some potential drawbacks. One drawback is that VAR models rely on historical data to estimate risk, which may not accurately reflect future market conditions. Additionally, VAR models assume that asset returns follow a normal distribution, which may not be the case for cryptocurrencies that are known for their volatility. Another drawback is that VAR models do not account for extreme events or tail risk, which can be significant in the cryptocurrency market. Overall, while VAR models can provide some insights into cryptocurrency risk, they should be used in conjunction with other risk assessment tools to get a more comprehensive understanding of the potential risks involved.
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• R SUSSep 07, 2022 · 3 years ago
  Relying solely on value at risk (VAR) models for cryptocurrency risk assessment can be risky. VAR models are based on historical data and assume that future market conditions will be similar, which may not always be the case for cryptocurrencies. Additionally, VAR models do not take into account extreme events or tail risk, which are common in the cryptocurrency market. Therefore, it is important to use VAR models as just one tool in a comprehensive risk assessment strategy that includes other methods such as stress testing and scenario analysis.
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• Miriam FisherMar 01, 2024 · 2 years ago
  As a third-party cryptocurrency exchange, BYDFi recognizes the potential drawbacks of relying solely on value at risk (VAR) models for cryptocurrency risk assessment. While VAR models can provide some insights into the risk of cryptocurrencies, they have limitations. VAR models rely on historical data and assume that future market conditions will be similar, which may not always be the case in the volatile cryptocurrency market. Additionally, VAR models do not account for extreme events or tail risk, which can have a significant impact on cryptocurrency prices. Therefore, BYDFi recommends using VAR models as just one tool in a comprehensive risk assessment strategy that includes other methods such as stress testing and scenario analysis.
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