Evaluation of multi-asset investment strategies with digital assets

Alla Petukhina () and Erin Sprünken ()
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Alla Petukhina: Humboldt-Universität zu Berlin
Erin Sprünken: Humboldt-Universität zu Berlin

Digital Finance, 2021, vol. 3, issue 1, No 3, 45-79

Abstract: Abstract The drastic growth of the cryptocurrencies market capitalization boosts investigation of their diversification benefits in portfolio construction. In this paper with a set of classical and modern measurement tools, we assess the out-of-sample performance of eight portfolio allocation strategies relative to the naive 1/N rule applied to traditional and crypto-assets investment universe. Evaluated strategies include a range from classical Markowitz rule to the recently introduced LIBRO approach (Trimborn et al. in Journal of Financial Econometrics 1–27, 2019). Furthermore, we also compare three extensions for strategies with respect to input estimators applied. The results show that in the presence of alternative assets, such as cryptocurrencies, mean–variance strategies underperform the benchmark portfolio. In contrast, CVaR optimization tends to outperform the benchmark as well as geometric optimization, although we find a strong dependence of the former’s success on trading costs. Furthermore, we find evidence that liquidity-bounded strategies tend to perform very well. Thus, our findings underscore the non-normal distribution of returns and the necessity to control for liquidity constraints at alternative asset markets.

Keywords: Portfolio management; Asset allocation; Investments; Alternative assets; Bitcoin; Cryptocurrencies; LIBRO (search for similar items in EconPapers)
JEL-codes: C01 C58 G11 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s42521-021-00031-9

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