How does price (in)efficiency influence cryptocurrency portfolios performance? The role of multifractality

Eduardo Amorim Vilela de Salis and Leandro Maciel

Quantitative Finance, 2023, vol. 23, issue 11, 1637-1658

Abstract: This paper proposes a new investment strategy in the cryptocurrency market based on a two-step procedure. The first step is the computation of the asset's levels of efficiency in an universe of cryptocurrencies. Price returns efficiency degrees are measured by their corresponding levels of multifractality, obtained by the multifractal detrended fluctuation analysis method. The higher the multifractality, the higher the inefficiency in terms of the weak form of market efficiency. Cryptocurrencies are then ranked in terms of efficiency. The second step is the construction of portfolios under the Markowitz framework composed of the most/least efficient digital coins. Minimum variance, maximum Sharpe ratio, equally weighted and (in)efficient-based portfolios were considered. The former strategy is also proposed, where the weights are computed proportionally to the assets levels of (in)efficiency. The main findings are: cryptocurrency price returns are multifractal and their levels of (in)efficiency change over time; returns exhibit left-sided asymmetry, which implies that subsets of large fluctuations contribute substantially to the multifractal spectrum; in bull markets portfolios with the least efficiency assets provided a better risk–return relation; in periods of high volatility and high price depreciation (bear market) a better performance is associated with the portfolios composed by the more efficient cryptocurrencies.

Date: 2023
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DOI: 10.1080/14697688.2023.2266448

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