Publication Type

Journal Article

Version

submittedVersion

Publication Date

3-2020

Abstract

Cryptocurrencies have left the dark side of the finance universe and become an object of study for asset and portfolio management. Since they have low liquidity compared to traditional assets, one needs to take into account liquidity issues when adding them to a portfolio. We propose a Liquidity Bounded Risk-return Optimization (LIBRO) approach, which is a combination of risk-return portfolio optimization under liquidity constraints. Cryptocurrencies are included in portfolios formed with stocks of the S&P 100, US Bonds, and commodities. We illustrate the importance of the liquidity constraints in an in-sample and out-of-sample study. LIBRO improves the weight optimization in the sense that it only adds cryptocurrencies in tradable amounts depending on the intended investment amount. The returns greatly increase compared to portfolios consisting only of traditional assets. We show that including cryptocurrencies in a portfolio can indeed improve its risk–return trade-off.

Keywords

Crypto-Currency, CRIX, Portfolio Investment, Asset Classes, Blockchain

Discipline

Finance | Finance and Financial Management

Publication

Journal of Financial Econometrics

Volume

18

Issue

2

First Page

280

Last Page

306

ISSN

1479-8409

Identifier

10.1093/jjfinec/nbz016

Publisher

Oxford University Press

Embargo Period

5-20-2021

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1093/jjfinec/nbz016

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