Bitcoin in International Portfolios: Mean-Variance, CVaR, and Regime Switching

Summary

The paper evaluates how adding Bitcoin affects an internationally diversified portfolio using mean-variance optimization, conditional value-at-risk, and Markov regime switching. The first two frameworks indicate that Bitcoin can improve diversification, but the author notes that they rely on linear return relationships and normal return distributions. Bitcoin returns do not satisfy both assumptions, motivating the development of a regime-switching approach.

The proposed model identifies two states from asset returns: a bear state with low means and high volatility, and a bull state with high means and low volatility. The excerpt does not report the regime model’s portfolio performance results or quantify Bitcoin’s final contribution under that approach. It also provides no sample details or implementation assumptions, so the stated diversification result should be read as specific to the initial frameworks rather than a definitive conclusion from the final method.

Key ideas

• The study compares mean-variance, CVaR, and Markov regime-switching approaches to international allocation with Bitcoin.
• Mean-variance and CVaR results suggest Bitcoin improves diversification in the analyzed portfolio.
• Those conventional frameworks assume linear return behavior and normal distributions.
• The regime-switching method identifies bear and bull states with different return and volatility characteristics.
• The excerpt does not state the final model’s portfolio performance or robustness results.

Tags

# 2205.00335


# Evaluating the Impact of Bitcoin on International Asset Allocation using Mean-Variance, Conditional Value-at-Risk (CVaR), and Markov Regime Switching Approaches









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 two regimes based on the assets' returns: 1- bear state, where returns have low means and high volatility, 2- bull state, where returns have high means and low volatility.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.