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Journal ArticleDOI: 10.1057/S41260-021-00211-7

Portfolio management and dependence structure between cryptocurrencies and traditional assets: evidence from FIEGARCH-EVT-Copula

04 Mar 2021-Journal of Asset Management (Palgrave Macmillan UK)-Vol. 22, Iss: 3, pp 224-239
Abstract: The purpose of this paper is twofold. Firstly, it discusses the relationship between five cryptocurrencies, oil prices, and US indices. Secondly, it focuses on determining the best portfolio hedging strategy. Using daily data relevant to the period ranging from January 4, 2016, to November 29, 2019, this study applies the FIEGARCH-EVT-Copula and Hedge ratios analysis. The findings obtained have shown that the crude oil (WTI) and the US indices return highlights the persistence of a negative and significant leverage effect while the cryptocurrency markets present a positive asymmetric volatility effect. Moreover, this paper show evidence of very weak dependence between all the different pairs considered before and after the introduction of Bitcoin Futures. Based on the Hedging ratio and mean-variance approach, this article suggests that to minimize the risk while keeping the same expected returns of the digital-conventional financial asset portfolio, the investor should hold more conventional financial assets than digital assets except for WTI-Bitcoin, WTI- Dash and WTI-Ethereum pairs which the values of their hedge ratios are rather important with respect to OLS regression.

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Topics: Portfolio (57%), Project portfolio management (52%), Futures contract (52%) ... read more
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Open accessPosted Content
Abstract: Bitcoin is a major virtual currency. Using weekly data over the 2010-2013 period, we analyze a Bitcoin investment from the standpoint of a U.S. investor with a diversified portfolio including both traditional assets (worldwide stocks, bonds, hard currencies) and alternative investments (commodities, hedge funds, real estate). Over the period under consideration, Bitcoin investment had highly distinctive features, including exceptionally high average return and volatility. Its correlation with other assets was remarkably low. Spanning tests confirm that Bitcoin investment offers significant diversification benefits. We show that the inclusion of even a small proportion of Bitcoins may dramatically improve the risk-return trade-off of well-diversified portfolios. Results should however be taken with caution as the data may reflect early-stage behavior which may not last in the medium or long run.

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Topics: Alternative investment (61%), Virtual currency (58%), Diversification (finance) (58%) ... read more

25 Citations


Open accessJournal ArticleDOI: 10.2139/SSRN.3614606
Abstract: The fundamental objective of portfolio diversification is to construct a portfolio of uncorrelated or mildly correlated assets so as to maximize the risk-adjusted returns on a portfolio. Portfolio Optimization is one of the techniques used by investment professionals to explore the potential of different assets in maximizing the risk-adjusted returns of the portfolio by adjusting the weight of each asset using simulations or constrained scenarios. A significant amount of research has already been conducted in the area of portfolio diversification that helps investors in devising their investment strategies and policies. Cryptocurrencies in general, and Bitcoin in particular, have aroused significant interest among investment professionals, policymakers, and regulators alike. Although much research has primarily focused on the legal and technological aspects of Bitcoin, the examination of other financial, diversification, hedge, and safe-haven aspects of Bitcoin has not progressed as far. This study explores the potential of Bitcoin as an alternative asset, and its potential in portfolio diversification, by using the portfolio optimization approach. The study employs the portfolio optimization approach under multiple constraining scenarios to evaluate the effectiveness of Bitcoin in portfolio diversification. A Monte-Carlo Simulation approach is then employed to evaluate the outcomes under each scenario by randomizing the outcomes of portfolio optimization. This study suggests that Bitcoin, due to its exotic nature, unwavering appeal, and unknown set of drivers, could at best act as a diversifier rather than a hedge or a safe-haven.

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Topics: Portfolio optimization (72%), Portfolio (71%), Diversification (finance) (64%) ... read more

3 Citations


Open accessJournal ArticleDOI: 10.3390/JRFM14070282
22 Jun 2021-
Abstract: This study investigates the performance of Bitcoin as a diversifier under different constraining portfolio optimization frameworks. The study employs different constraining optimization frameworks that seek to maximize risk-adjusted returns (Sharpe ratio) of the portfolio by optimizing allocations to each asset class (asset allocation). The performance attributes are evaluated by comparing the portfolios both with and without Bitcoin under frameworks ranging from equal-weighted, risk-parity, and semi-constrained to unconstrained. This study suggests that Bitcoin, due to its exotic nature, unwavering appeal, and unknown set of drivers, could act as a diversifier in normal market conditions, and it might also have some borderline hedge to safe haven properties. The results further suggest that while Bitcoin may be a potential diversifier for a risk-seeking investor, the risk-averse investor must exercise caution by limiting their exposure to Bitcoin in their portfolios, as unnecessary exposure may increase the probability of losses in extreme market conditions.

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Topics: Portfolio (59%), Portfolio optimization (58%), Asset allocation (55%) ... read more

2 Citations


Journal ArticleDOI: 10.1108/IJOEM-03-2020-0264
Abstract: In a first place, the present paper is designed to examine the dynamic correlations persistent between five cryptocurrencies, WTI, Gold, VIX and four stock markets (SP500, FTSE, NIKKEI and MSCIEM). In a second place, it investigates the relevant optimal hedging strategy.,Empirically, the authors examine how WTI, Gold, VIX and five cryptocurrencies can be applicable to hedge the four stock markets. Three variants of multivariate GARCH models (DCC, ADCC and GO-GARCH) are implemented to estimate dynamic optimal hedge ratios.,The reached findings prove that both of the Bitcoin and Gold turn out to display remarkable hedging commodity features, while the other assets appear to demonstrate a rather noticeable disposition to act as diversifiers. Moreover, the results show that the VIX turns out to stand as the most effectively appropriate instrument, fit for hedging the stock market indices various related refits. Furthermore, the results prove that the hedging strategy instrument was indifferent for FTSE and NIKKEI stock while for the American and emerging markets, the hedging strategy was reversed from the pre-cryptocurrency crash to the during cryptocurrency crash period.,The first paper's empirical contribution lies in analyzing emerging cross-hedge ratios with financial assets and compare hedging effectiveness within the period of crash and the period before Bitcoin crash as well as the sensitivity of results to refits choose to compare between short term hedging strategy and long-term one.

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Topics: Stock market (56%), Stock market index (53%), Hedge (finance) (53%)

2 Citations


Open accessJournal ArticleDOI: 10.1007/S40822-021-00181-6
Achraf Ghorbel1, Ahmed Jeribi2Institutions (2)
Abstract: In this paper, we examine the relationship between the volatilities of the energy index, crude oil, gas prices, and financial assets (Gold, Bitcoin, and G7 stock indexes), especially during the coronavirus crisis. The study tests the presence of regime changes in the GARCH volatility dynamics of the G7 stock indexes, Bitcoin, Gold, and energy assets (energy index, oil, and gas) by using the Markov–Switching GARCH model. It estimates the dynamic correlation and volatility spillover between energy and financial assets, by using the multivariate MSGARCH models. The estimation results of the Markov-Switching-BEKK-GARCH prove the volatility spillover from energy assets to financial assets. For the high regime, the results indicate a high level of dynamic correlation between energy assets and stock indexes which proves the contagion effect of the COVID-19. On the contrary, the dynamic conditional correlation between energy assets and Gold prices decreased during the COVID-19 crisis. This paper makes an original contribution in identifying the contagion between energy and financial assets and indicates that Gold is a safe haven for all energy and financial assets during the COVID-19 crisis. However, Bitcoin cannot be considered as a safe haven during the COVID-19 pandemic when investing in energy assets (crude oil and gas).

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1 Citations


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42 results found


Open access
01 Jan 1959-

5,733 Citations


Journal ArticleDOI: 10.1016/0304-4076(95)01736-4
Tim Bollerslev1, Hans Ole Mikkelsen2Institutions (2)
Abstract: A new class of fractionally integrated GARCH and EGARCH models for characterizing financial market volatility is discussed. Monte Carlo simulations illustrate the reliability of quasi maximum likelihood estimation methods, standard model selection criteria, and residual-based portmanteau diagnostic tests in this context. New empirical evidence suggests that the apparent long-run dependence in U.S. stock market volatility is best described by a mean-reverting fractionally integrated process, so that a shock to the optimal forecast of the future conditional variance dissipate at a slow hyperbolic rate. The asset pricing implications of this finding is illustrated via the implementation of various option pricing formula.

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Topics: Implied volatility (66%), Volatility smile (65%), Forward volatility (64%) ... read more

1,191 Citations


Journal ArticleDOI: 10.2307/2331164
Abstract: Most research on hedging has disregarded both the long-run cointegrating relationship between financial assets and the dynamic nature of the distributions of the assets. This study argues that neglecting these affects the hedging performance of the existing models and proposes an alternative model that accounts for both of them. Using a bivariate error correction model with a GARCH error structure, the risk-minimizing futures hedge ratios for several currencies are estimated. Both within-sample comparisons and out-of-sample comparisons reveal that the proposed model provides greater risk reduction than the conventional models. Furthermore, a dynamic hedging strategy is proposed in which the potential risk reduction is more than enough to offset the transactions costs for most investors.

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998 Citations


Open accessJournal ArticleDOI: 10.2139/SSRN.2361599
David Yermack1Institutions (1)
Abstract: A bona fide currency functions as a medium of exchange, a store of value, and a unit of account, but bitcoin largely fails to satisfy these criteria. Bitcoin has achieved only scant consumer transaction volume, with an average well below one daily transaction for the few merchants who accept it. Its volatility is greatly higher than the volatilities of widely used currencies, imposing large short-term risk upon users. Bitcoin’s daily exchange rates exhibit virtually zero correlation with widely used currencies and with gold, making bitcoin useless for risk management and exceedingly difficult for its owners to hedge. Bitcoin prices of consumer goods require many decimal places with leading zeros, which is disconcerting to retail market participants. Bitcoin faces daily hacking and theft risks, lacks access to a banking system with deposit insurance, and it is not used to denominate consumer credit or loan contracts. Bitcoin appears to behave more like a speculative investment than a currency.

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Topics: Cryptocurrency (60%), Digital currency (59%), Currency (55%) ... read more

552 Citations


Open accessJournal ArticleDOI: 10.1016/J.ECONLET.2018.01.004
01 Apr 2018-Economics Letters
Abstract: We analyse, in the time and frequency domains, the relationships between three popular cryptocurrencies and a variety of other financial assets. We find evidence of the relative isolation of these assets from the financial and economic assets. Our results show that cryptocurrencies may offer diversification benefits for investors with short investment horizons. Time variation in the linkages reflects external economic and financial shocks.

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502 Citations