Journal of Risk

Extremes of extremes: risk assessment for very small samples with an exemplary application for cryptocurrency returns

Christoph J. Börner, Ingo Hoffmann, Jonas Krettek, Lars M. Kürzinger and Tim Schmitz

  • Regulatory requirements demand a worst-case assessment of risk from financial institutions.
  • We develop a procedure for risk assessment at very high quantiles.
  • The method shows its strength in small samples and long-term risk forecasts.
  • As an acid test and to determine the limits, high-risk cryptocurrencies are analyzed.

Regulatory authorities require some institutional investors to carry out a worst-case risk assessment and a worst-case risk forecast. In many cases, the amount of (ex post) available data is limited, and long-term time ranges must be covered ex ante in the risk report. Both of these factors make a risk assessment appear impossible at first glance. We present a method of conducting a risk assessment for very small samples (and, in the extreme case, for a single data point) based on the statistical distribution of the extreme value. The proposed risk assessment method is demonstrated using cryptocurrency returns as an example.

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