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News and subjective beliefs: A Bayesian approach to Bitcoin investments

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  • Flori, Andrea

Abstract

The use of crypto-currencies in financial applications is receiving increasing interest. This paper relies on a Bayesian framework that combines market-neutral information with subjective beliefs to show an application of how Bitcoin can be exploited to build diversified investment strategies. By means of an intuitive procedure based on the Black and Litterman model, I propose to relate portfolio construction with the role of news in generating investors’ subjective beliefs, which are computed according to market reactions occurred after similar announcement events in the recent past. To test this approach, the analysis refers to an extremely volatile market phase for Bitcoin such as the interval from mid-2017 to mid-2018. Results indicate that Bitcoin can contribute to improve the risk-adjusted performances of diversified portfolios and that investors’ subjective beliefs can help to interpret the fundamental drivers of crypto-currencies’ market behaviors. This approach may also stimulate the investigation of more sophisticated strategies built according to the relationships between news and investors’ personal views on Bitcoin market dynamics.

Suggested Citation

  • Flori, Andrea, 2019. "News and subjective beliefs: A Bayesian approach to Bitcoin investments," Research in International Business and Finance, Elsevier, vol. 50(C), pages 336-356.
    • Handle: RePEc:eee:riibaf:v:50:y:2019:i:c:p:336-356
    DOI: 10.1016/j.ribaf.2019.05.007
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    3. Kyriazis, Nikolaos & Papadamou, Stephanos & Corbet, Shaen, 2020. "A systematic review of the bubble dynamics of cryptocurrency prices," Research in International Business and Finance, Elsevier, vol. 54(C).
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