This study is based on the analysis of the effect of Bitcoin inclusion on the performance of the diversified portfolio of traditional financial assets. Then, we will compare the performance of the portfolio that includes Bitcoin with that which does not by determining the adequate weighting of each financial asset.
We adopt the Student copula (t copula) to model the dependency structure between Bitcoin, different stock indices (S&P 500, EURO STOXX 50, Nikkei 225), JP Morgan bond and MSCI World stock. Then, we calculate the value at risk (VaR) and conditional value at risk (CVaR) at the 95% confidence level. In addition, we choose the Sharpe ratio and Stable Tail-Adjusted Return Ratio (STARR) to analyze the impact of Bitcoin inclusion on the performance of the diversified portfolio by determining the optimal weighting of each asset.
The results indicate that the inclusion of Bitcoin in a diversified portfolio of traditional assets allows to improve the performance of the constructed portfolio.
The use of copulas is difficult in higher dimensions, where the Student copula (t copula) cannot account for the more complex features between variables. Future research should expand on the empirical analysis of other approaches that are more sophisticated.
Given the speculative nature of the Bitcoin market, our results can be beneficial for investors and managers by asserting that BTC is a useful and relevant asset to improve portfolio performance along with traditional assets.
The emergence of new asset classes in finance leads investors to seek innovative and potential investment opportunities with low correlation with other financial assets. This implies that our work offers the possibility of considering Bitcoin as an effective source of diversification against stock market risk and as a new investment asset class.
The results affirm to investors and managers that Bitcoin is a relevant asset to improve portfolio performance with other traditional asset classes. In these circumstances, regulators are trying to better understand the dynamics of Bitcoin returns over time and its risk criterion in order to increase the protection and monitoring related to investors’ investments.
