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Portfolio optimization in the era of digital financialization using cryptocurrencies

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  • Ma, Yechi
  • Ahmad, Ferhana
  • Liu, Miao
  • Wang, Zilong

Abstract

The Fourth industrial revolution has seen many innovative technologies that are now challenging traditional economies. The innovative and technological financial instruments are inspiring individuals and expert investors to investigate the broader investment spectrum, and consequently diversify their portfolios. Going beyond the conventional portfolios and developing state-of-the-art strategies that comply with the ever-changing financial and technological advancements are the keys to long term sustainability. Therefore, to cater to the needs of all segments of the society, the investment strategies during the fourth industrial revolution demand exposure to technological and digital financial innovations. This study investigates the impact of diversification with the addition of five cryptocurrencies from November 2015 to November 2019 on four traditional asset portfolios. The results show that the diversification increased the returns in most of the cases, and reduced the portfolio volatility in all portfolios, and also provided higher returns as compared to the traditional portfolios for the same level of risk. This study also revealed that the results might improve when short sales are allowed. Moreover, we can conclude that the addition of multiple cryptocurrencies in a portfolio provides enhanced results for diversification, and Ethereum provides a better diversification opportunity as compared to Bitcoin.

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  • Ma, Yechi & Ahmad, Ferhana & Liu, Miao & Wang, Zilong, 2020. "Portfolio optimization in the era of digital financialization using cryptocurrencies," Technological Forecasting and Social Change, Elsevier, vol. 161(C).
    • Handle: RePEc:eee:tefoso:v:161:y:2020:i:c:s004016252031091x
    DOI: 10.1016/j.techfore.2020.120265
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    8. Walid Bakry & Audil Rashid & Somar Al-Mohamad & Nasser El-Kanj, 2021. "Bitcoin and Portfolio Diversification: A Portfolio Optimization Approach," JRFM, MDPI, vol. 14(7), pages 1-24, June.
    9. Gambarelli, Luca & Marchi, Gianluca & Muzzioli, Silvia, 2023. "Hedging effectiveness of cryptocurrencies in the European stock market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 84(C).
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    More about this item

    Keywords

    Cryptocurrency; Financial innovation; Portfolio diversification; Investment; Financial markets; Technological innovation;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • F3 - International Economics - - International Finance
    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services

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