Analyzing diversification benefits of cryptocurrencies through backfill simulation

JH Kim - Finance Research Letters, 2022 - Elsevier
Finance Research Letters, 2022Elsevier
The cryptocurrency market provides an interesting diversification opportunity for asset
allocation due to its fundamental differences compared to traditional asset classes. Even
though the cryptocurrency market experienced a surge until 2017, the market has relatively
stabilized since the bubble along with increased participation from institutional investors.
Instead of only performing analysis for the recent years, which is short for testing asset
allocation benefits, we focus on the post-bubble market condition but backfill cryptocurrency …
Abstract
The cryptocurrency market provides an interesting diversification opportunity for asset allocation due to its fundamental differences compared to traditional asset classes. Even though the cryptocurrency market experienced a surge until 2017, the market has relatively stabilized since the bubble along with increased participation from institutional investors. Instead of only performing analysis for the recent years, which is short for testing asset allocation benefits, we focus on the post-bubble market condition but backfill cryptocurrency returns into the past in order to analyze a longer investment horizon. In our backfill simulation, investment in cryptocurrencies show higher return but mixed results in terms of portfolio efficiency for risk-based optimized portfolios. Even though risk-based models allocate a small portion in cryptocurrencies, its high volatility limits diversification benefits since even small allocations often lead to higher portfolio risk.
Elsevier
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