Ryu, Duchwan D.
M.S. (Master of Science)
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.
Mahmoudi, Mohammadreza, "Evaluating the Impact of Bitcoin on international asset Allocation using Mean-Variance, Conditional Value-at-Risk (CVaR), and Markov Regime Switching Approaches" (2023). Graduate Research Theses & Dissertations. 7161.
Northern Illinois University
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