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Cryptocurrencies and portfolio diversification in an emerging market

Author

Listed:
  • Lehlohonolo Letho
  • Grieve Chelwa
  • Abdul Latif Alhassan

Abstract

Purpose - This paper examines the effect of cryptocurrencies on the portfolio risk-adjusted returns of traditional and alternative investments within an emerging market economy. Design/methodology/approach - The paper employs daily arithmetic returns from August 2015 to October 2018 of traditional assets (stocks, bonds, currencies), alternative assets (commodities, real estate) and cryptocurrencies. Using the mean-variance analysis, the Sharpe ratio, the conditional value-at-risk and the mean-variance spanning tests. Findings - The paper documents evidence to support the diversification benefits of cryptocurrencies by utilising the mean-variance tests, improving the efficient frontier and the risk-adjusted returns of the emerging market economy portfolio of investments. Practical implications - This paper firmly broadens the Modern Portfolio Theory by authenticating cryptocurrencies as assets with diversification benefits in an emerging market economy investment portfolio. Originality/value - As far as the authors are concerned, this paper presents the first evidence of the effect of diversification benefits of cryptocurrencies on emerging market asset portfolios constructed using traditional and alternative assets.

Suggested Citation

  • Lehlohonolo Letho & Grieve Chelwa & Abdul Latif Alhassan, 2022. "Cryptocurrencies and portfolio diversification in an emerging market," China Finance Review International, Emerald Group Publishing Limited, vol. 12(1), pages 20-50, January.
    • Handle: RePEc:eme:cfripp:cfri-06-2021-0123
    DOI: 10.1108/CFRI-06-2021-0123
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Sabri Boubaker & T.D.Q. Le & R. Manita & T. Ngo, 2023. "The Trade-off Frontier for ESG and Sharpe Ratio: A Bootstrapped Double-Frontier Data Envelopment Analysis," Post-Print hal-04434028, HAL.
    2. Wang, Yizhi & Wei, Yu & Lucey, Brian M. & Su, Yang, 2023. "Return spillover analysis across central bank digital currency attention and cryptocurrency markets," Research in International Business and Finance, Elsevier, vol. 64(C).
    3. Wei, Yu & Wang, Yizhi & Lucey, Brian M. & Vigne, Samuel A., 2023. "Cryptocurrency uncertainty and volatility forecasting of precious metal futures markets," Journal of Commodity Markets, Elsevier, vol. 29(C).
    4. Mercik, Aleksander & Słoński, Tomasz & Karaś, Marta, 2024. "Understanding crypto-asset exposure: An investigation of its impact on performance and stock sensitivity among listed companies," International Review of Financial Analysis, Elsevier, vol. 92(C).
    5. Felföldi-Szűcs, Nóra & Králik, Balázs & Váradi, Kata, 2024. "Put–call parity in a crypto option market — Evidence from Binance," Finance Research Letters, Elsevier, vol. 61(C).
    6. Li, Linwen & Gao, Wei & Gu, Wanhong, 2023. "Fintech, bank concentration and commercial bank profitability: Evidence from Chinese urban commercial banks," Finance Research Letters, Elsevier, vol. 57(C).

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    More about this item

    Keywords

    Alternative assets; Cryptocurrencies; Portfolio optimisation; C61; G11; G32; L25;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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