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Evaluating the Impact of Bitcoin on International Asset Allocation using Mean-Variance, Conditional Value-at-Risk (CVaR), and Markov Regime Switching Approaches

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  • Mohammadreza Mahmoudi

Abstract

This paper aims to analyze the effect of Bitcoin on portfolio optimization using mean-variance, conditional value-at-risk (CVaR), and Markov regime switching approaches. I assessed each approach and developed the next based on the prior approach's weaknesses until I ended with a high level of confidence in the final approach. Though the results of mean-variance and CVaR frameworks indicate that Bitcoin improves the diversification of a well-diversified international portfolio, they assume that assets' returns are developed linearly and normally distributed. However, the Bitcoin return does not have both of these characteristics. Due to this, I developed a Markov regime switching approach to analyze the effect of Bitcoin on an international portfolio performance. The results show that there are two regimes based on the assets' returns: 1- bear state, where returns have low means and high volatility, 2- bull state, where returns have high means and low volatility.

Suggested Citation

  • Mohammadreza Mahmoudi, 2022. "Evaluating the Impact of Bitcoin on International Asset Allocation using Mean-Variance, Conditional Value-at-Risk (CVaR), and Markov Regime Switching Approaches," Papers 2205.00335, arXiv.org.
    • Handle: RePEc:arx:papers:2205.00335
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    File URL: http://arxiv.org/pdf/2205.00335
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    Cited by:

    1. Mohammadreza Mahmoudi, 2023. "Examining the Effect of Monetary Policy and Monetary Policy Uncertainty on Cryptocurrencies Market," Papers 2311.10739, arXiv.org.

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