The End of Mean-Variance? Tsallis Entropy Revolutionises Portfolio Optimisation in Cryptocurrencies

Sana Gaied Chortane () and Kamel Naoui
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Sana Gaied Chortane: Institute of Higher Business Study of Sousse, University of Sousse, Sousse 4000, Tunisia
Kamel Naoui: Department of Finance, Tunis School of Business (ESCT), University of Manouba, Manouba 2010, Tunisia

JRFM, 2025, vol. 18, issue 2, 1-30

Abstract: Has the mean-variance framework become obsolete? In this paper, we replace traditional variance–covariance methods of portfolio optimisation with relative Tsallis entropy and mutual information measures. Its goal is to enhance risk management and diversification in complicated finance ecosystems. We utilize the S&P 500 and Bitwise 10 cryptocurrency indices’ daily returns (2019–2024 data) and conduct our analysis to the year 2020 under extreme shocks. Many models were trained with different configurations, like mean-variance (MV), mean-entropy (ME), and mean-mutual information (MI) traders and their corresponding variants, using Sharpe’s ratio, Jensen’s alpha, and entropy value of risk (EVAR). The findings indicate that entropic models outperform conventional models in terms of diversification and, especially, extreme risk management. Because the appropriate normalization conditions often fail to be satisfied, we can informally see that after a recalibration of the effective frontier, we obtain from EVAR an accumulated resilience aspect to these rare events while also observing the great potential of entropy-based models to replicate non-linear dependencies between assets. The results show that models combining entropy and mutual information optimise the gain–loss ratio (GLR), providing stable diversification and improved risk management, while maximising returns in complex and volatile market environments.

Keywords: Tsallis entropy; mutual information; entropic value-at-risk; portfolio optimisation; cryptocurrencies; S&P 500 (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2025
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