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
Citation
TRIMBORN, Simon; LI, Mingyang; and HARDLE, Wolfgang Karl.
Investing with cryptocurrencies: A liquidity constrained investment approach. (2020). Journal of Financial Econometrics. 18, (2), 280-306.
Available at: https://ink.library.smu.edu.sg/skbi/6
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1093/jjfinec/nbz016