Investing with Cryptocurrencies – evaluating their potential for portfolio allocation strategies

61 Pages Posted: 7 Nov 2018 Last revised: 5 Jun 2020

See all articles by Alla Petukhina

Alla Petukhina

Humboldt University of Berlin - Institute for Statistics and Econometrics

Simon Trimborn

National University of Singapore (NUS) - Department of Mathematics

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)

Hermann Elendner

Humboldt University of Berlin - School of Business and Economics

Date Written: May 25, 2020

Abstract

Cryptocurrencies (CCs) have risen rapidly in market capitalization over the last years. Despite striking price volatility, their high average returns have drawn attention to CCs as alternative investment assets for portfolio and risk management. We investigate the utility gains for different types of investors when they consider cryptocurrencies as an addition to their portfolio of traditional assets. We consider risk-averse, return-seeking as well as diversification-preferring investors who trade along with different allocation frequencies, namely daily, weekly or monthly. Out-of-sample performance and diversification benefits are studied for the most popular portfolio-construction rules, including mean-variance optimization, risk-parity, and maximum-diversification strategies, as well as combined strategies. To account for low liquidity in CC markets, we incorporate liquidity constraints via the LIBRO method. Our results show that CCs can improve the risk-return profile of portfolios. In particular, a maximum-diversification strategy (maximizing the Portfolio Diversification Index, PDI) draws appreciably on CCs, and spanning tests clearly indicate that CC returns are non-redundant additions to the investment universe. Though our analysis also shows that illiquidity of CCs potentially reverses the results.

Keywords: Cryptocurrency, CRIX, Investments, Portfolio Management, Asset Classes, Blockchain, Bitcoin, Altcoins, DLT

JEL Classification: C01, C58, G11

Suggested Citation

Petukhina, Alla and Trimborn, Simon and Härdle, Wolfgang K. and Elendner, Hermann, Investing with Cryptocurrencies – evaluating their potential for portfolio allocation strategies (May 25, 2020). Available at SSRN: https://ssrn.com/abstract=3274193 or http://dx.doi.org/10.2139/ssrn.3274193

Alla Petukhina (Contact Author)

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

Unter den Linden 6
Berlin, AK Berlin 10099
Germany

Simon Trimborn

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

Department of Mathematics
Singapore, 117543
Singapore

Wolfgang K. Härdle

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

Hermann Elendner

Humboldt University of Berlin - School of Business and Economics ( email )

Spandauer Str. 1
Berlin, D-10099
Germany

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