Publication Date


Document Type


First Advisor

Ryu, Duchwan D.

Degree Name

M.S. (Master of Science)

Legacy Department

Department of Statistics and Actuarial Science


This paper aims to analyze the effect of Bitcoin on portfolio optimization using mean-variance, conditional value-at-risk (CVaR), and Markov regime switching approaches. I assessed each approach and developed the next based on the prior approach’s weaknesses until I ended with a high level of confidence in the final approach. Though the results of mean-variance and CVaR frameworks indicate that Bitcoin improves the diversification of a well-diversified international portfolio, they assume that assets’ returns are developed linearly and normally distributed. However, the Bitcoin return does not have both of these characteristics. Due to this, I developed a Markov regime switching approach to analyze the effect of Bitcoin on an international portfolio performance. The results show that there are four regimes based on the assets’ returns: 1) high negative and high volatile return, 2) low negative and low volatile return, 3) low positive and low volatile return, 4) high positive and high volatile return. In regimes 2 and 3 the sharp ratio for a portfolio with bitcoin is lower than a portfolio without bitcoin. However, in regimes 1 and 4 the sharp ratio confirms that a higher average return of the portfolio with Bitcoin overcompensates the rise in risk.


30 pages




Northern Illinois University

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NIU theses are protected by copyright. They may be viewed from Huskie Commons for any purpose, but reproduction or distribution in any format is prohibited without the written permission of the authors.

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Finance Commons