The Diversification Benefits of Cryptocurrency Asset Categories and Estimation Risk: Pre and Post COVID-19

Huang, Xinyu; Han, Weihao; Newton, David; Platanakis, Emmanouil; Stafylas, Dimitrios; Sutcliffe, Charles

doi:10.2139/ssrn.3894874

Cited by 4 publications

(1 citation statement)

References 84 publications

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“…They found that adding a very small position in digital assets to a diversified portfolio significantly reduces its overall risk and can offer opportunities for portfolio diversification. Huang et al (2021) examined the performance of nine cryptocurrency asset categories and concluded that most of the categories provide diversification benefits, depending on an investor's risk aversion.…”

Section: Introductionmentioning

confidence: 99%

Assessing the Risk Characteristics of the Cryptocurrency Market: A GARCH-EVT-Copula Approach

Bruhn

Ernst

2022

JRFM

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The cryptocurrency market offers significant investment opportunities but also entails higher risks as compared to other asset classes. This article aims to analyse the financial risk characteristics of individual cryptocurrencies and of a broad cryptocurrency market portfolio. We construct a portfolio comprising the 20 largest cryptocurrencies, which cover 82.1% of the total cryptocurrency market. The returns are examined for extreme tail risks by the application of Extreme Value Theory. We utilise the GARCH-EVT approach in combination with a novel algorithm to automatically determine the optimal threshold to model the tail distribution. Furthermore, we aggregate the individual market risks with a t-Student Copula to investigate possible diversification effects on a portfolio level. The empirical analysis indicates that all examined cryptocurrencies show high volatility in their price movements, whereby Bitcoin acts as the most stable cryptocurrency. All return distributions are heavy-tailed and subject to extreme tail risks. We find strong, positive intra-market correlations, in particular with the two largest cryptocurrencies Bitcoin and Ethereum. No diversification effect can be achieved by aggregating market risks. On the contrary, a negligibly lower expected return and higher joint extreme returns can be observed. From this analysis, it can be concluded that investments in individual cryptocurrencies as well as in a portfolio show extreme risks of losses. From the investor’s point of view, a possible strategy of risk reduction through portfolio formation within cryptocurrencies is only promising to a limited extent and does not offer a satisfactory solution to significantly reduce the risk within this asset class.

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Section: Introductionmentioning

confidence: 99%

Assessing the Risk Characteristics of the Cryptocurrency Market: A GARCH-EVT-Copula Approach

Bruhn

Ernst

2022

JRFM

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A Time-Varying Network for Cryptocurrencies

Guo

Härdle

Tao

2022

Journal of Business & Economic Statistics

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Cryptocurrencies return cross-predictability and technological similarity yield information on risk propagation and market segmentation. To investigate these effects, we build a timevarying network for cryptocurrencies, based on the evolution of return cross-predictability and technological similarities. We develop a dynamic covariate-assisted spectral clustering method to consistently estimate the latent community structure of cryptocurrencies network that accounts for both sets of information. We demonstrate that investors can achieve better risk diversification by investing in cryptocurrencies from different communities. A cross-sectional portfolio that implements an inter-crypto momentum trading strategy earns a 1.08% daily return. By dissecting the portfolio returns on behavioral factors, we confirm that our results are not driven by behavioral mechanisms.

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Market-moving events and their role in portfolio optimization of generations X, Y, and Z

Iwanicz-Drozdowska,

Rogowicz,

Smaga

2023

International Journal of Management and Economics

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We examine how generations X, Y, and Z might react to market-moving events over short- and long-term horizons to maintain an optimal balance among risk, return, and investor preferences. To analyze various portfolio variants, we use data on selected global assets and several types of economic and non-economic events for 2000-2021H1, applying the mean-variance optimization procedure. According to our results, in optimal portfolios, fixed-income assets dominate and are the main driver of portfolio adjustments. Portfolios with short-term horizons with less risk-averse investors and those for generation Z are the most reactive to analyzed types of events. None of the events per se creates an extraordinary opportunity to increase returns. However, expansionary monetary policy generates the greatest potential for incremental returns. Our findings provide practical implications for investors on how to adjust their portfolios in response to significant market events.

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The Diversification Benefits of Cryptocurrency Asset Categories and Estimation Risk: Pre and Post COVID-19

Cited by 4 publications

References 84 publications

Assessing the Risk Characteristics of the Cryptocurrency Market: A GARCH-EVT-Copula Approach

Assessing the Risk Characteristics of the Cryptocurrency Market: A GARCH-EVT-Copula Approach

A Time-Varying Network for Cryptocurrencies

Market-moving events and their role in portfolio optimization of generations X, Y, and Z

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