Portfolio Diversification Benefits of Bitcoin for Higher-Order Risk Averters

Student: Lapitskiy Ivan

Educational Programme: Master of Finance (Master)

Final Grade: 9

Year of Graduation: 2024

The paper studies diversification benefits of Bitcoin for higher-order risk averters under the prism of stochastic dominance efficiency. We found that a portfolio formed of the market equity index and Bitcoin using mean-variance-skewness-kurtosis optimization criteria is stochastic dominance efficient at orders two and three relative to a choice set consisting of several benchmark portfolios and Bitcoin but is inefficient at order four. This means that all risk-averse and prudent (skewness-loving) investors can increase their expected utility levels as compared to pure market index investing by combining market equity index with Bitcoin using optimization criteria that considers higher order moments of return distribution. At the same time, only limited evidence is found for the diversification benefits of Bitcoin in the mean-variance efficiency framework. This highlights the importance of taking higher order moments of the return distribution into account when assessing the diversification benefits of Bitcoin.

Full text (added May 19, 2024)

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