Does Bitcoin Improve Investment Portfolio Efficiency?

Pawel Sakowski and Daria Turovtseva

No 2020-42, Working Papers from Faculty of Economic Sciences, University of Warsaw

Abstract: The aim of the paper is to check if cryptocurrency Bitcoin – a new investable asset class representative – is able to improve the performance of an optimal portfolio. Using two Markowitz criteria of optimization – expected return maximization and expected shortfall (CVaR) minimization – we test the investment opportunities after adding Bitcoin to the portfolio of 10 traditional assets (among them equity, fixed income, money, commodities and money market indices). Using daily observations from 1.05.2013 till 24.05.2019, we examine the behavior of the portfolios without and with Bitcoin and check if the return-risk ratio improves for the latter. Discussing the results, we conduct the sensitivity analysis by changing the lookback window (LB) and rebalancing frequency (RB) parameters. Empirical analysis suggests that Bitcoin-inclusive portfolios provide an investor with wider diversification opportunities. Robustness check confirms the findings and also advocates for the cryptocurrency to be added to the portfolio.

Keywords: Portfolio optimization; portfolio theory; cryptocurrency; Bitcoin; Markowitz model; asset allocation; portfolio diversification; investment opportunities (search for similar items in EconPapers)
JEL-codes: C20 C22 C61 C80 G14 G17 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2020
New Economics Papers: this item is included in nep-cwa, nep-ore, nep-pay and nep-rmg
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https://www.wne.uw.edu.pl/index.php/download_file/6098/ First version, 2020 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:war:wpaper:2020-42

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