Portfolio Management with Cryptocurrencies: The Role of Estimation Risk
Economics Letters, Forthcoming
12 Pages Posted: 9 Dec 2018 Last revised: 23 Jan 2019
Date Written: January 21, 2019
This paper contributes to the literature on cryptocurrencies, portfolio management and estimation risk by comparing the performance of naïve diversification, Markowitz diversification and the advanced Black-Litterman model with VBCs that controls for estimation errors in a portfolio of cryptocurrencies. We show that the advanced Black-Litterman model with VBCs yields superior out-of-sample risk-adjusted returns as well as lower risks. Our results are robust to the inclusion of transaction costs and short-selling, indicating that sophisticated portfolio techniques that control for estimation errors are preferred when managing cryptocurrency portfolios.
Keywords: Cryptocurrencies, Estimation Errors, Portfolio Optimization
JEL Classification: G1; G2; G11
Suggested Citation: Suggested Citation