Cryptocurrency Replication Using Machine Learning

29 Pages Posted: 26 Aug 2023

See all articles by Richard D. F. Harris

Richard D. F. Harris

University of Bristol, School of Accounting and Finance; University of Bristol, School of Accounting and Finance

Murat Mazibas

University of Dundee School of Business; Institute of Applied Mathematics; University of Exeter Business School

Dooruj Rambaccussing

University of Dundee

Abstract

Cryptocurrencies are characterized by high volatility and low correlations with traditional asset classes, and present an intriguing investment opportunity. However, their inherent risks and regulatory uncertainties make direct investment challenging for many investors. This paper addresses this challenge by proposing a replication framework that employs machine learning to create synthetic cryptocurrency portfolios that replicate the risk-adjusted return profile and diversification benefits of cryptocurrencies. We show that synthetic cryptocurrency portfolios offer a compelling alternative to direct investment in cryptocurrencies, delivering superior risk-adjusted returns net of trading costs while mitigating the risks that are associated with holding cryptocurrencies directly. Furthermore, synthetic cryptocurrency portfolios provide better diversification benefits and lower tail risk.

Keywords: Portfolio replication, Cryptocurrencies, Machine learning algorithms

Suggested Citation

Harris, Richard D. F. and Mazibas, Murat and Rambaccussing, Dooruj, Cryptocurrency Replication Using Machine Learning. Available at SSRN: https://ssrn.com/abstract=4552637 or http://dx.doi.org/10.2139/ssrn.4552637

University of Bristol, School of Accounting and Finance

United Kingdom

HOME PAGE: http://www.bristol.ac.uk/people/person/Richard-Harris-50ffa5fb-0e86-4458-8e8c-8dace6eb3435/

Murat Mazibas

University of Dundee School of Business ( email )

Dundee, Scotland DD1 4HN
United Kingdom

Institute of Applied Mathematics ( email )

Ankara, 06531
Turkey

University of Exeter Business School ( email )

Streatham Court
Xfi Building, Rennes Dr.
Exeter, EX4 4JH
United Kingdom

Dooruj Rambaccussing

University of Dundee ( email )

Dundee, Scotland DD1 4HN
United Kingdom
07942310707 (Phone)

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