Tail Risk & Skewness

Overview

This indicator evaluates the tail risk of an asset. It assesses the potential for rare, extreme price fluctuations in a cryptocurrency, offering insights into the investment risk in highly volatile scenarios.

Tail risk is typically measured using a metric called Value at Risk (VaR) or Conditional Value at Risk (CVaR). VaR measures the maximum loss that won't be exceeded with a certain confidence level, while CVaR measures the expected loss in case the VaR is exceeded.

In addition, this indicator also evaluates the skewness or asymmetry in the distribution of a cryptocurrency's returns. It provides insights into potential risk, with negative skewness often indicating higher risk due to a larger number of extreme negative returns.

Skewness is calculated using a statistical formula that measures the degree of asymmetry of returns around its mean. A distribution with a positive skew has a long right tail (i.e., a higher probability of extreme positive returns), while a distribution with a negative skew has a long left tail (i.e., a higher probability of extreme negative returns).

💡 How can I use it?

This indicator is useful to measure and understand the potential for extreme losses in an asset's price. It provides an estimate of the maximum potential loss over a given time period, offering investors a way to quantify the extreme downside risk and manage their portfolio accordingly.

Furthermore, the skewness helps investors understand the nature of returns and potential risk in investing in a particular cryptocurrency. A negative skewness, indicating a higher probability of extreme negative returns, may be seen as higher risk. The same goes for a positive skewness, in which a higher chance for positive returns exists.