Using Precious Metals to Reduce the Downside Risk of FinTech Stocks

Perry Sadorsky ()
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Perry Sadorsky: Schulich School of Business, York University, Toronto, ON M3J 1P3, Canada

FinTech, 2024, vol. 3, issue 4, 1-14

Abstract: FinTech stocks are an important new asset class that reflects the rapidly growing FinTech sector. This paper studies the practical implications of using gold, silver, and basket-of-precious-metals (gold, silver, platinum, palladium) ETFs to diversify risk in FinTech stocks. Downside risk reduction is estimated using relative risk ratios based on CVaR. The analysis shows that gold provides the most downside risk protection. For a 5% CVaR, a 30% portfolio weight for gold reduces the downside risk by about 25%. The minimum variance and minimum correlation three-asset (FinTech, gold, and silver) portfolios (with portfolio weights estimated using a TVP-VAR model) have the highest risk-adjusted returns (Sharpe ratio, Omega ratio) followed by the fixed-weight FinTech and gold portfolio. These results show the benefits of diversifying an investment in FinTech stocks with precious metals. These results are robust to weekly or monthly portfolio rebalancing and reasonable transaction costs.

Keywords: FinTech stocks; downside risk; minimum variance portfolio; gold; portfolio analysis (search for similar items in EconPapers)
JEL-codes: C6 F3 G O3 (search for similar items in EconPapers)
Date: 2024
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