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Should investors include Bitcoin in their portfolios? A portfolio theory approach
Institution:1. University Tunis Carthage- Carthage Business School, LEFA-IHEC Carthage, Tunisia;2. Center of Research for Energy and Climate Change (CRECC), Paris School of Business, France;3. Institut des Hautes Etudes Commerciales (IHEC), Tunisia;1. ICMA Centre, Henley Business School, University of Reading, Reading, United Kingdom;2. Management School, University of Sheffield, Sheffield, United Kingdom
Abstract:Many papers in recent years have examined the benefits of adding alternative assets to traditional portfolios containing stocks and bonds. Bitcoin has emerged as a new alternative investment for investors which has attracted much attention from the media and investors alike. However relatively little is known about the investment benefits of Bitcoin and therefore this paper examines the benefit of including Bitcoin in a traditional benchmark portfolio of stocks and bonds. Specially, we employ data up to June 2018 and analyse the potential out-of-sample portfolio benefits resulting from including Bitcoin in a stock-bond portfolio for a range of eight popular asset allocation strategies. The out-of-sample analysis shows that, across all different asset allocation strategies and risk aversions, the benefits of Bitcoin are quite considerable with substantially higher risk-adjusted returns. Our results are robust to rolling estimation windows, the incorporation of transaction costs, the inclusion of a commodity portfolio, alternative indices, short-selling as well as two additional optimization techniques including higher moments with (and without) variance-based constraints (VBCs). Therefore, our results suggest that investors should include Bitcoin in their portfolio as it generates substantial higher risk-adjusted returns.
Keywords:FinTech  Bitcoin  Diversification  Out-of-sample performance  Portfolio optimization
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