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Portfolio management and dependence structure between cryptocurrencies and traditional assets: evidence from FIEGARCH-EVT-Copula

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Abstract

The purpose of this paper is twofold. Firstly, it discusses the relationship between five cryptocurrencies, oil prices, and US indices. Secondly, it focuses on determining the best portfolio hedging strategy. Using daily data relevant to the period ranging from January 4, 2016, to November 29, 2019, this study applies the FIEGARCH-EVT-Copula and Hedge ratios analysis. The findings obtained have shown that the crude oil (WTI) and the US indices return highlights the persistence of a negative and significant leverage effect while the cryptocurrency markets present a positive asymmetric volatility effect. Moreover, this paper show evidence of very weak dependence between all the different pairs considered before and after the introduction of Bitcoin Futures. Based on the Hedging ratio and mean-variance approach, this article suggests that to minimize the risk while keeping the same expected returns of the digital-conventional financial asset portfolio, the investor should hold more conventional financial assets than digital assets except for WTI-Bitcoin, WTI- Dash and WTI-Ethereum pairs which the values of their hedge ratios are rather important with respect to OLS regression.

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Notes

  1. Although CBOE opened a futures market on December 10, trading volume was too small until the CME launched Bitcoin futures (Hale et al. 2018) on December 18, 2017, so we choose December 18, 2017, as the day when Bitcoin futures were introduced.

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Authors and Affiliations

  1. Faculty of Economics and Management of Mahdia, Mahdia, Tunisia

    Ahmed Jeribi

  2. Higher Institute of Business Administration of Sfax, Sfax, Tunisia

    Mohamed Fakhfekh

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  1. Ahmed Jeribi
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  2. Mohamed Fakhfekh
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Correspondence to Ahmed Jeribi.

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Jeribi, A., Fakhfekh, M. Portfolio management and dependence structure between cryptocurrencies and traditional assets: evidence from FIEGARCH-EVT-Copula. J Asset Manag 22, 224–239 (2021). https://doi.org/10.1057/s41260-021-00211-7

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  • DOI: https://doi.org/10.1057/s41260-021-00211-7

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