It’s all in the timing again: simple active portfolio strategies that outperform naïve diversification in the cryptocurrency market

ABSTRACT

This article analyzes whether cryptocurrencies’ inclusion improves stock portfolios’ performance and whether the application of portfolio selection methodologies would bring gains to investors in the digital currency market. Volatility Timing and Reward-to-Risk Timing methodologies were applied to a base containing only S&P 100 stocks, another containing only cryptocurrencies, and one mixing the previous two. The results suggest that the inclusion of cryptocurrencies has not brought performance gains to the stock portfolios and that the investor in the cryptocurrency market can benefit from the use of portfolio selection.

KEYWORDS:

• Cryptocurrencies
• portfolio selection
• bitcoin
• volatility timing

JEL CLASSIFICATION:

• G10
• G11

Acknowledgments

João Frois Caldeira gratefully acknowledges the support provided by CNPq under grant 306886/2018-9.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Except for two assets due to the unavailability of data for the entire period.

² See Cochrane (2009) for more details.:

³ See Clarke, De Silva, and Thorley (2011) for a detailed review of the methodology.

⁴ The Ledoit and Wolf (2008) test results indicate no difference between RRT(2) and 1/n portfolios.