Cryptocurrencies and portfolio diversification in an emerging market

TLDR

The study investigates how cryptocurrencies affect the risk‑adjusted returns of traditional and alternative assets in an emerging market economy. Using daily arithmetic returns from August 2015 to October 2018 for stocks, bonds, currencies, commodities, real estate, and cryptocurrencies, the authors apply mean‑variance analysis, the Sharpe ratio, conditional value‑at‑risk, and mean‑variance spanning tests. Results demonstrate that cryptocurrencies enhance diversification, improve the efficient frontier, and raise risk‑adjusted returns, thereby extending Modern Portfolio Theory to emerging‑market portfolios.

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.