A two-stage framework for enhancing crsyptocurrency portfolio performance: Integrating credibilistic CVaR criterion with a novel asset preselection approach

Hossein Ghanbari, Sina Tavakoli, Mostafa Shabani, Emran Mohammadi, Seyed Jafar Sadjadi and Ronald Ravinesh Kumar

PLOS ONE, 2025, vol. 20, issue 7, 1-45

Abstract: In an increasingly diverse investment landscape, the cryptocurrency market has emerged as a compelling option, offering the potential for high returns, diversification opportunities, and significant liquidity. However, the inherent volatility and regulatory uncertainties of this market present substantial risks, underscoring the need for a well-structured investment strategy. Among the various strategies available, portfolio optimization has become a dynamic and evolving area of focus in finance. Despite advancements in financial modeling, traditional portfolio optimization models often fall short, as uncertainty remains a fundamental characteristic of capital markets. To address this challenge, this paper integrates credibility theory with the Conditional Value-at-Risk (CVaR) framework, harnessing their combined strengths in modeling downside risk and managing uncertainty. Nevertheless, relying solely on this model may not be sufficient for achieving optimal investment outcomes, as portfolio optimization models often neglect the crucial step of selecting high-quality assets. This highlights the essential need for a robust pre-selection process. To tackle this issue, this paper introduces a novel pre-selection framework based on Multi-Attribute Decision Making (MADM) methods. Acknowledging that different MADM approaches can yield varying results—which creates uncertainty regarding the most reliable method—this research proposes a systematic framework for asset evaluation. By considering these factors, this paper proposes a two-stage framework for enhancing cryptocurrency portfolio performance. Stage 1, involves establishing comprehensive performance criteria for cryptocurrencies and employing a novel method for asset pre-selection. Stage 2 focuses on optimizing the selected assets using a credibilistic CVaR model, while considering practical constraints from real-world investment scenarios. The results of this two-stage framework demonstrate its effectiveness in constructing well-diversified and efficient portfolios, addressing both the challenges of asset pre-selection and the complexities associated with uncertainty. By integrating these methodologies, investors can navigate the risks associated with cryptocurrency investments more effectively while maximizing potential returns.

Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:plo:pone00:0325973

DOI: 10.1371/journal.pone.0325973

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