Humboldt-Universität zu Berlin - High Dimensional Nonstationary Time Series

SFB649DP2017 014

Investing with cryptocurrencies - A liquidity constrained investment approach

Simon Trimborn
Mingyang Li
Wolfgang Karl Härdle

Cryptocurrencies have left the dark side of the finance universe and become an object of study for asset and portfolio management. Since they have a low liquidity compared to traditional assets, one needs to take into account liquidity issues when one puts them into the same portfolio. We propose use a Liquidity Bounded Risk-return Optimization (LIBRO) approach, which is a combination of the Markowitz framework under the liquidity constraints. The results show that cryptocurrencies add value to a portfolio and the optimization approach is even able to increase the return of a portfolio and lower the volatility risk.

crypto-currency, CRIX, portfolio investment, asset classes, blockchain

JEL Classification:
C01, C58, G11