Bitcoin and liquidity risk diversification

Yosra Ghabri, Khaled Guesmi and Ahlem Zantour

Finance Research Letters, 2021, vol. 40, issue C

Abstract: This paper investigates the potential diversification benefits of adding Bitcoin from a liquidity perspective. Using different multivariate GARCH-Type specifications to model the joint dynamics of the selected financial assets, we find that VARMA (1, 1)-cDCC-GARCH is the best-fit model. By examining the dependence structure between Bitcoin and several financial assets, we find evidence of a low time-varying correlation of liquidity innovations over the period 2014–2019. This finding suggests the existence of a potential gain in diversifying the liquidity risk using Bitcoin instead of traditional assets. The results of the portfolio optimization problem when adding the liquidity constraint show that holding Bitcoin can reduce the liquidity risk under the Mean-Variance-Liquidity framework.

Keywords: Bitcoin; diversification; liquidity innovations; liquidity risk; dynamic multivariate GARCH (search for similar items in EconPapers)
JEL-codes: C22 C32 G11 G15 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:40:y:2021:i:c:s154461232030012x

DOI: 10.1016/j.frl.2020.101679

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