Investing with Cryptocurrencies—a Liquidity Constrained Investment Approach*

Simon Trimborn (), Mingyang Li and Wolfgang Härdle

Journal of Financial Econometrics, 2020, vol. 18, issue 2, 280-306

Abstract: Cryptocurrencies have left the dark side of the finance universe and become an object of study for asset and portfolio management. Since they have low liquidity compared to traditional assets, one needs to take into account liquidity issues when adding them to a portfolio. We propose a Liquidity Bounded Risk-return Optimization (LIBRO) approach, which is a combination of risk-return portfolio optimization under liquidity constraints. Cryptocurrencies are included in portfolios formed with stocks of the S&P 100, US Bonds, and commodities. We illustrate the importance of the liquidity constraints in an in-sample and out-of-sample study. LIBRO improves the weight optimization in the sense that it only adds cryptocurrencies in tradable amounts depending on the intended investment amount. The returns greatly increase compared to portfolios consisting only of traditional assets. We show that including cryptocurrencies in a portfolio can indeed improve its risk–return trade-off.

Keywords: asset classes; blockchain; crypto-currency; CRIX; portfolio investment (search for similar items in EconPapers)
JEL-codes: C01 C58 G11 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (16)

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Working Paper: Investing with cryptocurrencies - A liquidity constrained investment approach (2017)
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