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

Abstract:
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.

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

JEL Classification:
C01, C58, G11