Optimization and Diversification of Cryptocurrency Portfolios: A Composite Copula-Based Approach

This paper focuses on the selection and optimisation of a cryptoasset portfolio, using the K-means clustering algorithm and GARCH C-Vine copula model combined with the differential evolution algorithm. This integrated approach allows the construction of a diversified portfolio of eight cryptocurrenc...

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Main Authors: Herve M. Tenkam, Jules C. Mba, Sutene M. Mwambi
Format: Article
Language:English
Published: MDPI AG 2022-06-01
Series:Applied Sciences
Subjects:
Online Access:https://www.mdpi.com/2076-3417/12/13/6408
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author Herve M. Tenkam
Jules C. Mba
Sutene M. Mwambi
author_facet Herve M. Tenkam
Jules C. Mba
Sutene M. Mwambi
author_sort Herve M. Tenkam
collection DOAJ
description This paper focuses on the selection and optimisation of a cryptoasset portfolio, using the K-means clustering algorithm and GARCH C-Vine copula model combined with the differential evolution algorithm. This integrated approach allows the construction of a diversified portfolio of eight cryptocurrencies and determines an optimal allocation strategy making it possible to minimize the conditional value-at-risk of the portfolio and maximise the return. Our results show that stablecoins such as True-USD are negatively correlated to the other cryptoassets in the portfolio and could therefore be a safe haven for crypto-investors during market turmoil. Our findings are in line with previous studies exhibiting stablecoins as potential diversifiers.
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spelling doaj.art-594d799e37fe49968fc3faffb88e06172023-11-23T19:36:08ZengMDPI AGApplied Sciences2076-34172022-06-011213640810.3390/app12136408Optimization and Diversification of Cryptocurrency Portfolios: A Composite Copula-Based ApproachHerve M. Tenkam0Jules C. Mba1Sutene M. Mwambi2Department of Mathematics and Applied Mathematics, North West University, P.O. Box 209, Potchefstroom 2520, South AfricaSchool of Economics, University of Johannesburg, P.O. Box 524, Auckland Park 2006, South AfricaSchool of Economics, University of Johannesburg, P.O. Box 524, Auckland Park 2006, South AfricaThis paper focuses on the selection and optimisation of a cryptoasset portfolio, using the K-means clustering algorithm and GARCH C-Vine copula model combined with the differential evolution algorithm. This integrated approach allows the construction of a diversified portfolio of eight cryptocurrencies and determines an optimal allocation strategy making it possible to minimize the conditional value-at-risk of the portfolio and maximise the return. Our results show that stablecoins such as True-USD are negatively correlated to the other cryptoassets in the portfolio and could therefore be a safe haven for crypto-investors during market turmoil. Our findings are in line with previous studies exhibiting stablecoins as potential diversifiers.https://www.mdpi.com/2076-3417/12/13/6408multivariate t-copulaCVaRdifferential evolution algorithmK-means clusteringvine copulacryptocurrency
spellingShingle Herve M. Tenkam
Jules C. Mba
Sutene M. Mwambi
Optimization and Diversification of Cryptocurrency Portfolios: A Composite Copula-Based Approach
Applied Sciences
multivariate t-copula
CVaR
differential evolution algorithm
K-means clustering
vine copula
cryptocurrency
title Optimization and Diversification of Cryptocurrency Portfolios: A Composite Copula-Based Approach
title_full Optimization and Diversification of Cryptocurrency Portfolios: A Composite Copula-Based Approach
title_fullStr Optimization and Diversification of Cryptocurrency Portfolios: A Composite Copula-Based Approach
title_full_unstemmed Optimization and Diversification of Cryptocurrency Portfolios: A Composite Copula-Based Approach
title_short Optimization and Diversification of Cryptocurrency Portfolios: A Composite Copula-Based Approach
title_sort optimization and diversification of cryptocurrency portfolios a composite copula based approach
topic multivariate t-copula
CVaR
differential evolution algorithm
K-means clustering
vine copula
cryptocurrency
url https://www.mdpi.com/2076-3417/12/13/6408
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