Investing with Cryptocurrencies - A Liquidity Constrained Investment Approach

37 Pages Posted: 19 Jul 2017 Last revised: 1 Jun 2018

See all articles by Simon Trimborn

Simon Trimborn

National University of Singapore (NUS) - Department of Statistics and Applied Probability

Mingyang Li

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

Wolfgang K. Härdle

Humboldt University of Berlin - Institute for Statistics and Econometrics; 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). 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 Statistics and Applied Probability ( email )

Block S16, Level 7
6 Science Drive 2
117546
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
+49 30 2093 5631 (Phone)
+49 30 2093 5649 (Fax)

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

Unter den Linden 6
Berlin, D-10099
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
602
rank
40,732
Abstract Views
1,779
PlumX