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Balancing Cryptoassets and Gold: A Weighted-Risk-Contribution Index for the Alternative Asset Space

Author

Listed:
  • Aikaterini Koutsouri

    (Imperial College London)

  • Francesco Poli

    (Imperial College London)

  • Elise Alfieri

    (CERAG - Centre d'études et de recherches appliquées à la gestion - UGA [2016-2019] - Université Grenoble Alpes [2016-2019])

  • Michael Petch
  • Walter Distaso

    (Imperial College London)

  • William J Knottenbelt

    (Imperial College London)

Abstract

Bitcoin is foremost amongst the emerging asset class known as cryptoassets. Two noteworthy characteristics of the returns of non-stablecoin cryptoassets are their high volatility, which brings with it a high level of risk, and their high intraclass correlation, which limits the benefits that can be had by diversifying across multiple cryptoassets. Yet cryptoassets exhibit no correlation with gold, a highly-liquid yet scarce asset which has proved to function as a safe haven during crises affecting traditional financial systems. As exemplified by Shannon's Demon, a lack of correlation between assets opens the door to principled risk control through so-called volatility harvesting involving periodic rebalancing. In this paper we propose an index which combines a basket of five cryp-toassets with an investment in gold in a way that aims to improve the risk profile of the resulting portfolio while preserving its independence from mainstream financial asset classes such as stocks, bonds and fiat currencies. We generalise the theory of Equal Risk Contribution to allow for weighting according to a desired level of contribution to volatility. We find a crypto-gold weighting based on Weighted Risk Contribution to be historically more effective in terms of Sharpe Ratio than several alternative asset allocation strategies including Shannon's Demon. Within the crypto-basket, whose constituents are selected and rebalanced monthly, we find an Equal Weighting scheme to be more effective in terms of the same metric than a market capitalisation weighting.

Suggested Citation

  • Aikaterini Koutsouri & Francesco Poli & Elise Alfieri & Michael Petch & Walter Distaso & William J Knottenbelt, 2019. "Balancing Cryptoassets and Gold: A Weighted-Risk-Contribution Index for the Alternative Asset Space," Post-Print hal-02952145, HAL.
    • Handle: RePEc:hal:journl:hal-02952145
    DOI: 10.1007/978-3-030-37110-4_15
    Note: View the original document on HAL open archive server: https://hal.science/hal-02952145
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    References listed on IDEAS

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