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Analysis of diversification benefits for cryptocurrency portfolios before and during the COVID-19 pandemic

Author

Listed:
  • Florin Aliu
  • Ujkan Bajra
  • Naim Preniqi

Abstract

Purpose - This study aims to investigate the diversification benefits attached to the crypto portfolios when combined with stocks, Forex instruments and commodity assets. Design/methodology/approach - Markowitz diversification techniques have been used to analyze the risk-return tradeoffs of the individual portfolios. Daily prices on cryptocurrencies and the selected asset classes, cover the period before and during the pandemic COVID-19. The portfolio risk of the portfolios was calculated by identical techniques and analyzed with equal criteria. Findings - The results with 270 trails indicate that stocks on average reduce the portfolio risk of crypto portfolios by 36% followed by fiat currency with 30.9% and commodities by 20.8%. Average daily returns stand in line with the standard portfolio theories where riskier portfolios offer higher returns and the other way around. Originality/value - The authors contribute to the current literature by investigating the portfolio risk attached to the crypto portfolios when stocks, commodities and Forex instruments were added separately. To this end, results inform not only retail investors but also portfolio managers on the asset classes that generate better optimization for crypto portfolios.

Suggested Citation

  • Florin Aliu & Ujkan Bajra & Naim Preniqi, 2021. "Analysis of diversification benefits for cryptocurrency portfolios before and during the COVID-19 pandemic," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 39(3), pages 444-457, September.
    • Handle: RePEc:eme:sefpps:sef-05-2021-0190
    DOI: 10.1108/SEF-05-2021-0190
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    Citations

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    Cited by:

    1. Almeida, José & Gonçalves, Tiago Cruz, 2023. "A systematic literature review of investor behavior in the cryptocurrency markets," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).
    2. Apergis, Nicholas, 2023. "Realized higher-order moments spillovers across cryptocurrencies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 85(C).

    More about this item

    Keywords

    Digital currencies; Diversification benefits; Portfolio risk; Portfolio allocation; G11; G12;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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