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The influence of Bitcoin on portfolio diversification and design

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  • Akhtaruzzaman, Md
  • Sensoy, Ahmet
  • Corbet, Shaen

Abstract

We employ a VARMA DCC-GARCH model to search for portfolio diversification with Bitcoin in global industry portfolios and bond index. We find lower dynamic conditional correlations between Bitcoin and industry portfolios and bond index, allowing an investment in Bitcoin to hedge the risk against industry portfolios and bonds. The most effective hedge in a Bitcoin/industry (bond) portfolio is to short Utilities sector. Results are robust to the use of US industry portfolios and a cryptocurrency index instead of global industry portfolios and Bitcoin, respectively. Our results can help investors make informed decisions with regard to risk management and portfolio analysis.

Suggested Citation

  • Akhtaruzzaman, Md & Sensoy, Ahmet & Corbet, Shaen, 2020. "The influence of Bitcoin on portfolio diversification and design," Finance Research Letters, Elsevier, vol. 37(C).
    • Handle: RePEc:eee:finlet:v:37:y:2020:i:c:s1544612319305215
    DOI: 10.1016/j.frl.2019.101344
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    References listed on IDEAS

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    More about this item

    Keywords

    Bitcoin; DCC; Optimal portfolio; Hedge ratio; Diversification;
    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
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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