Optimization of portfolios with cryptocurrencies: Markowitz and GARCH-Copula model approach
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arXiv
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| Auteurs principaux: | , , , |
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| Format: | Preprint |
| Publié: |
2023
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| _version_ | 1866913181864034304 |
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| author | Jeleskovic, Vahidin Latini, Claudio Younas, Zahid I. Al-Faryan, Mamdouh A. S. |
| author_facet | Jeleskovic, Vahidin Latini, Claudio Younas, Zahid I. Al-Faryan, Mamdouh A. S. |
| contents | The growing interest in cryptocurrencies has drawn the attention of the financial world to this innovative medium of exchange. This study aims to explore the impact of cryptocurrencies on portfolio performance. We conduct our analysis retrospectively, assessing the performance achieved within a specific time frame by three distinct portfolios: one consisting solely of equities, bonds, and commodities; another composed exclusively of cryptocurrencies; and a third, which combines both 'traditional' assets and the best-performing cryptocurrency from the second portfolio.To achieve this, we employ the classic variance-covariance approach, utilizing the GARCH-Copula and GARCH-Vine Copula methods to calculate the risk structure. The optimal asset weights within the optimized portfolios are determined through the Markowitz optimization problem. Our analysis predominantly reveals that the portfolio comprising both cryptocurrency and traditional assets exhibits a higher Sharpe ratio from a retrospective viewpoint and demonstrates more stable performances from a prospective perspective. We also provide an explanation for our choice of portfolio optimization based on the Markowitz approach rather than CVaR and ES. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2401_00507 |
| institution | arXiv |
| publishDate | 2023 |
| record_format | arxiv |
| spellingShingle | Optimization of portfolios with cryptocurrencies: Markowitz and GARCH-Copula model approach Jeleskovic, Vahidin Latini, Claudio Younas, Zahid I. Al-Faryan, Mamdouh A. S. Portfolio Management Applications The growing interest in cryptocurrencies has drawn the attention of the financial world to this innovative medium of exchange. This study aims to explore the impact of cryptocurrencies on portfolio performance. We conduct our analysis retrospectively, assessing the performance achieved within a specific time frame by three distinct portfolios: one consisting solely of equities, bonds, and commodities; another composed exclusively of cryptocurrencies; and a third, which combines both 'traditional' assets and the best-performing cryptocurrency from the second portfolio.To achieve this, we employ the classic variance-covariance approach, utilizing the GARCH-Copula and GARCH-Vine Copula methods to calculate the risk structure. The optimal asset weights within the optimized portfolios are determined through the Markowitz optimization problem. Our analysis predominantly reveals that the portfolio comprising both cryptocurrency and traditional assets exhibits a higher Sharpe ratio from a retrospective viewpoint and demonstrates more stable performances from a prospective perspective. We also provide an explanation for our choice of portfolio optimization based on the Markowitz approach rather than CVaR and ES. |
| title | Optimization of portfolios with cryptocurrencies: Markowitz and GARCH-Copula model approach |
| topic | Portfolio Management Applications |
| url | https://arxiv.org/abs/2401.00507 |