Investing with Cryptocurrencies - A Liquidity Constrained Investment Approach

Published version: Trimborn, S., Li, M. and W. K. Härdle (2019) "Investing with Cryptocurrencies—a Liquidity Constrained Investment Approach" Journal of Financial Econometrics, doi.org/10.1093/jjfinec/nbz016

37 Pages Posted: 19 Jul 2017 Last revised: 12 Jul 2019

See all articles by Simon Trimborn

Simon Trimborn

National University of Singapore (NUS) - Department of Mathematics

Mingyang Li

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE)

Wolfgang K. Härdle

Humboldt University of Berlin - Institute for Statistics and Econometrics; Xiamen University - Wang Yanan Institute for Studies in Economics (WISE); Charles University; Humboldt University of Berlin - Center for Applied Statistics and Economics (CASE)

Date Written: May 25, 2018

Abstract

Cryptocurrencies have left the dark side of the finance universe and become an object of study for asset and portfolio management. Since they have a low liquidity compared to traditional assets, one needs to take into account liquidity issues when adding them to the same portfolio. We propose a LIquidity Bounded Risk-return Optimization (LIBRO) approach, which is a combination of risk-return portfolio optimization under liquidity constraints. In the application cryptocurrencies are included into portfolios formed with S&P 100 component stocks, US-Bonds and Commodities. We illustrate the importance of the liquidity constraints in an in-sample and out-of-sample study. LIBRO improves the weight optimization in the sense of adding cryptocurrencies only in tradable amounts depending on the intended investment amount. The return increases strongly in-sample and out-of-sample. The paper shows that including cryptocurrencies can indeed improve the risk-return trade-off of the portfolio.

Keywords: Crypto-Currency, CRIX, Portfolio Investment, Asset Classes, Blockchain

JEL Classification: C01, C58, G11

Suggested Citation

Trimborn, Simon and Li, Mingyang and Härdle, Wolfgang K., Investing with Cryptocurrencies - A Liquidity Constrained Investment Approach (May 25, 2018). Published version: Trimborn, S., Li, M. and W. K. Härdle (2019) "Investing with Cryptocurrencies—a Liquidity Constrained Investment Approach" Journal of Financial Econometrics, doi.org/10.1093/jjfinec/nbz016. Available at SSRN: https://ssrn.com/abstract=2999782 or http://dx.doi.org/10.2139/ssrn.2999782

Simon Trimborn

National University of Singapore (NUS) - Department of Mathematics ( email )

Department of Mathematics
Singapore, 117543
Singapore

Mingyang Li

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

A 307, Economics Building
Xiamen, Fujian 10246
China

Wolfgang K. Härdle (Contact Author)

Humboldt University of Berlin - Institute for Statistics and Econometrics ( email )

Unter den Linden 6
Berlin, D-10099
Germany

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

A 307, Economics Building
Xiamen, Fujian 10246
China

Charles University ( email )

Celetná 13
Dept Math Physics
Praha 1, 116 36
Czech Republic

Humboldt University of Berlin - Center for Applied Statistics and Economics (CASE)

Unter den Linden 6
Berlin, D-10099
Germany

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