Asymmetry in asset class correlations : how can bitcoin fill the gap ?
SONAR|HES-SO
- Spedaliero, Ludovic
- Wandeler, Jean-Pierre (Degree supervisor)
- Genève : Haute école de gestion de Genève
43 p.
Bachelor of Science HES in International Business Management: Haute école de gestion de Genève, 2022
English
Modern finance theory suggests that investors should diversify their investment portfolio with multi-asset allocation, in a manner that when financial markets are facing extreme crisis, the portfolio can act as a buffer. This is implying very low or negative correlation between asset classes during downside market movements. Of course, asset allocation plays also a big part on risk exposure; however, the problematic of the precise percentage allocated to each asset classes in a portfolio is not part of the scope of this study. Beyond asset allocations, the problematic of this study relates to the unfavorable asymmetry in asset class correlation and the potential to find a new asset class that could fill this gap. More precisely, the purpose of this study is to find out if the Bitcoin can become the new asset class, which could provide favorable characteristics of asymmetry in asset class correlation. Recent years studies have highlighted the unfavorable profile of correlation asymmetry between asset classes. Indeed, these studies suggest that diversification is a myth considering its characteristics of downside market unification and upside market diversification. In other words, diversification works best when it is not needed and does not work when it is actually needed. This research aims at finding out if Bitcoin can be used as a potential diversifier in a multi-asset portfolio; and mostly if it can, with its particular and exotic nature, provide a favorable asymmetry of correlation among asset classes. Meaning, the dream of all investors: downside diversification and upside unification.
The study worked on conditional correlation between seven asset-classes, including Bitcoin. The conditional correlation was computed with the help of R-Studio programming software, on a double conditioning basis, as reflected in the literature review section, and on a single conditioning basis, as suggested in the recent studies. Double and single conditional correlations on empirical data collected and on generated bivariate normal distribution data, have been calculated, compared and analyzed. Findings confirm that diversification does not work in most cases and provide downside market unification and upside market diversification, very unfavorable profile. However, some findings also highlight the potential of using Bitcoin as main asset driver in an investment portfolio with EX US equities as diversifier, which can provide downside market diversification and upside market unification, very favorable situation. To some extent, a similar favorable situation can be found with US equities as the main asset driver and Treasury bonds as diversifier. Recommendations based on findings suggest that investors should be prepared to take advantage of the partial negative correlation of some assets pairs, and to be ready to re-adjust their position when extreme market downturns is happening, just before diversification vanishes.
The study worked on conditional correlation between seven asset-classes, including Bitcoin. The conditional correlation was computed with the help of R-Studio programming software, on a double conditioning basis, as reflected in the literature review section, and on a single conditioning basis, as suggested in the recent studies. Double and single conditional correlations on empirical data collected and on generated bivariate normal distribution data, have been calculated, compared and analyzed. Findings confirm that diversification does not work in most cases and provide downside market unification and upside market diversification, very unfavorable profile. However, some findings also highlight the potential of using Bitcoin as main asset driver in an investment portfolio with EX US equities as diversifier, which can provide downside market diversification and upside market unification, very favorable situation. To some extent, a similar favorable situation can be found with US equities as the main asset driver and Treasury bonds as diversifier. Recommendations based on findings suggest that investors should be prepared to take advantage of the partial negative correlation of some assets pairs, and to be ready to re-adjust their position when extreme market downturns is happening, just before diversification vanishes.
- Language
-
- English
- Classification
- Economics
- Notes
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- Haute école de gestion de Genève
- International Business Management
- hesso:hegge
- Persistent URL
- https://sonar.ch/global/documents/321853
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