Should investors include bitcoin in their portfolio? New evidence from a bootstrap-based stochastic dominance approach

ABSTRACT

This paper investigates the potential portfolio diversification benefits by introducing the Bitcoin to the traditional diversified financial portfolio. Using a bootstrap-based stochastic dominance (SD) test and daily prices of the commodity and stock market indices, we find that the introduction of Bitcoin improves the performance of the traditional financial portfolio and the optimal portfolio choice changes according to the market regime. Principally, results show that the optimal portfolio diversification combining Bitcoin, US stock market and commodities indices can be a good hedge, offering risk-averse, more performing portfolio investments during any financial crisis.

KEYWORDS:

• Bitcoin
• portfolio diversification
• stochastic dominance
• market Regimes

JEL CLASSIFICATION:

• C31
• C58
• G12.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Coin Market Cap provides a real time update of the market capitalization of cryptocurrencies: https://coinmarketcap.com/

² See Hamilton (1994) and Kim and Nilson (1999) for more details on the estimation method.

³ We define$D_Z^j$analogously for the second MSR portfolio.

⁴ Referring to Linton, Maasoumi, and Whang (2005) test.

⁵ For more details, see Bahloul, Mroua, and Naifar (2017).