Portfolio Optimisation in the Cryptocurrency Market: Hybrid Integration of Markowitz and Ridge Methods

Rüya Kaplan Yıldırım, Turgay Münyas and Gülden Kadooğlu Aydın
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Rüya Kaplan Yıldırım: Adana Alparslan Türkeş Bilim ve Teknoloji Üniversitesi
Turgay Münyas: İstanbul Okan Üniversitesi
Gülden Kadooğlu Aydın: Harran Üniversitesi

Istanbul Journal of Economics-Istanbul Iktisat Dergisi, 2025, vol. 75, issue 1, 207-221

Abstract: Constructing an effective asset allocation strategy requires building well-diversified portfolios that maintain robust performance beyond the sample data. The classical Markowitz portfolio optimisation, while widely used, is known to suffer from issues such as estimation errors and sensitivity to multicollinearity, which can significantly distort the allocation process and reduce performance reliability. In order to surmount the aforementioned challenges, the incorporation of Machine Learning echniques, specifically Ridge regression, into the portfolio creation process has been effected. This has resulted in the provision of a hybrid model that combines the strengths of Markowitz optimisation and Ridge regression. The integration of these approaches within the hybrid model serves to mitigate the prediction risks while maintaining the diversification benefits inherent to the Markowitz framework. The model was trained using an 80/20 split and cross-validation was employed to prevent overfitting. The findings indicate that this integrated approach attains the maximum Sharpe ratio, thereby significantly enhancing risk-adjusted returns and portfolio stability when applied to cryptoasset returns. The findings emphasise the merits of integrating classical optimisation methodologies with machine learning to develop more robust and adaptive asset allocation strategies. By analysing the impact of high-volatility cryptoassets on portfolio performance, it makes important contributions to both the literature and practical portfolio strategies for investors.

Keywords: Hybrid method; Crypto assets; Markowitz optimisation; Ridge method (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:ist:journl:v:75:y:2025:i:1:p:207-221

DOI: 10.26650/ISTJECON2024-1643134

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