Abstract
•This paper examines the connectedness between cryptocurrencies and fiat currencies.•The approach employs canonical and drawable vine copulas.•Risk management is investigated through VaR and ES.•Vines produce accurate risk measures for a portfolio including cryptocurrencies.
This paper examines the connectedness between cryptocurrencies and major fiat currencies in a multivariate framework using vine copulas. One of the advantages of this method is the flexibility in the choice of distributions used to model complex dependencies. The results show that the dependence, measured conditionally or unconditionally, is positive and higher for the pairs of the same market than those across markets. Moreover, a low significant dependency is found between cryptocurrencies and the main conventional currencies. Based on the Value-at-Risk (VaR) and expected shortfall (ES) analyses, vine copulas produce accurate risk measures by adding cryptocurrencies to a portfolio of fiat currencies.