Score-driven cryptocurrency and equity portfolios

ABSTRACT

This paper discusses whether the Bitcoin exchange-traded fund (ETF), which tracks the value of Bitcoin, improves equity portfolios, by using a robust portfolio performance analysis. The equity portfolio is represented by an ETF that tracks the Standard & Poor’s 500. We use data from a turbulent investment period within the coronavirus pandemic, to study the diversification benefits of Bitcoin. We compare the performances of diverse portfolios composed of both ETFs, which include 40 classical dynamic volatility model-based portfolios and 900 score-driven portfolios. For the score-driven portfolios, the dynamic association is modelled by score-driven Clayton, rotated Clayton, Gumbel, rotated Gumbel and Student’s t copulas. We compare portfolio strategies using the model confidence set test. We find that score-driven portfolios outperform classical volatility model-based portfolios and the equity portfolio. Our results may provide suggestions for cryptocurrency investors on portfolio optimization and may also have policy implications for regulators and policymakers.

KEYWORDS:

• Equity plus Bitcoin portfolios
• COVID-19 (coronavirus pandemic of 2019)
• dynamic conditional score (DCS) models
• generalized autoregressive score (GAS) models

JEL CLASSIFICATION:

• C32
• C52
• C58
• G11

Acknowledgments

The authors greatly appreciate the helpful comments of the anonymous reviewers of the journal, Astrid Ayala, Matthew Copley and Adrian Licht. All remaining errors are our own.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data availability statement

Data and computer codes are available from the authors upon request .

Supplementary material

Supplemental data for this article can be accessed online at https://doi.org/10.1080/00036846.2023.2182406

Additional information

Funding

The work was supported by the Universidad Francisco Marroquin .