Abstract
This study examines the tail dependence structure and risk spillover among cryptocurrencies within the framework of morphological classification, based on the proof of stake and proof of work consensus mechanisms. The study utilizes the c-vine copulas to capture the tail dependence of each pair of assets, and CoVaR and Delta CoVaR are used to compute the risk spillover. Daily returns spanning the period, 22-09-2020 to 07-04-2023 are used for our estimation of tail dependence and risk spillover among the selected cryptocurrencies. The c-vine copula is a statistical tool used to model the dependence relationship between pairs of cryptocurrency assets, while CoVaR (Conditional Value at Risk) and Delta CoVaR are used as measures to quantify the extent of systemic risk and the contribution of individual cryptocurrencies to systemic risk. The copula findings for the proof of stakes cryptocurrencies indicate a relatively strong positive correlation between the assets analysed. The lower tail dependence between Ethereum and the other seven cryptocurrencies ranges from 0.45 to 0.67, which we consider to be an acceptable level of risk sharing given the generally high correlation observed in the cryptocurrency market. The copula findings for the proof of work cryptocurrencies shows that the lower tail dependence between Bitcoin cash and the other nine cryptocurrency assets falls between 0.45 and 0.75 which in our view appears to be an acceptable risk sharing given the high correlation that cryptocurrency is generally subject to. When analysing the risk spillover among proof of stake and proof of work cryptocurrencies from our CoVaR analysis, the results from the proof of stake portfolio shows a signifcant risk spillover from Ethereum to the other seven proof of stake cryptocurrencies, making Ethereum the top risk transmitter among these assets. Similarly, this study uncovers from the CoVaR analysis of the proof of work cryptocurrencies that Bitcoin exercise significant power over the other selected cryptocurrencies. Bitcoin seems to be the highest risk transmitter in the proof of work cryptocurrencies portfolio with a positive CoVaR of 0.15. Meanwhile, the rest of the proof of work cryptocurrencies have their CoVaR around zero like Litecoin, and below zero or negative for the other cryptocurrencies making them shock absorbers. It appears that the risk profile of this selected Proof of work cryptocurrencies remained constant not exhibiting shifting dynamics as noticed in the proof of stake cryptocurrencies. While in the proof of stake cryptocurrencies, all their CoVaR is below zero including Ethereum, for the proof of work, their CoVaR remains negative or zero except for Bitcoin which is highly positive. Overall,
Ethereum and Bitcoin, the two top leading cryptocurrency remains the highest risk spillover transmitters in their respective portfolios throughout the whole period of studies.