Investing with cryptocurrencies – evaluating their potential for portfolio allocation strategies

Alla Petukhina, Simon Trimborn (), Wolfgang Härdle and Hermann Elendner

Quantitative Finance, 2021, vol. 21, issue 11, 1825-1853

Abstract: Cryptocurrencies (CCs) have risen rapidly in market capitalization over the past years. Despite striking volatility, their high average returns and low correlations have established CCs as alternative investment assets for portfolio and risk management. We investigate the benefits of adding CCs to well-diversified portfolios of conventional financial assets for different types of investors, including risk-averse, return-maximizing and diversification-seeking investors who may trade at different frequencies, namely, daily, weekly or monthly. We calculate out-of-sample performance and diversification benefits for the most popular portfolio-construction rules, including mean-variance optimization, risk-parity, and maximum-diversification strategies, as well as combined strategies. Our results demonstrate that CCs can improve the risk-return profile of portfolios, but their benefit depends on investor objectives. In particular, diversification strategies (maximizing the portfolio diversification index or equating risk contributions) draw appreciably on CCs and show, in line with spanning tests, CCs to be non-redundant extensions of the investment universe. However, when we introduce liquidity constraints via the LIBRO method to account for illiquidity of many CCs, out-of-sample performance drops considerably, while the diversification benefits persist. We conclude that the utility of CC investments strongly depends on investor characteristics.

Date: 2021
References: Add references at CitEc
Citations: View citations in EconPapers (19)

Downloads: (external link)
http://hdl.handle.net/10.1080/14697688.2021.1880023 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Investing with Cryptocurrencies -- evaluating their potential for portfolio allocation strategies (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:21:y:2021:i:11:p:1825-1853

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RQUF20

DOI: 10.1080/14697688.2021.1880023

Access Statistics for this article

Quantitative Finance is currently edited by Michael Dempster and Jim Gatheral

More articles in Quantitative Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().