Impact of Crypto Assets as Risk Diversifiers: A VAR-based Analysis of Portfolio Risk Reduction

Authors

  • Muhammad Nadeem Assistant director, Human Resource, Minhaj University Lahore, Pakistan Author
  • Arfan Shahzad Independent Researcher Author
  • Yasmin Anwar Independent Researcher Author

DOI:

https://doi.org/10.61506/01.00173

Keywords:

Portfolio risk, crypto assets, Bitcoin, ETH, Granger causality test, VAR, IRF

Abstract

This research aims to empirically investigate the portfolio risk associated with crypto assets. In other words, we want to investigate whether the inclusion of crypto assets in a portfolio can minimize the portfolio risk or not, because it is argued that there is a lower degree of correlation between crypto assets and traditional assets. In order to achieve our research objectives, we employ the Vector Autoregressive Model (VAR) by using five different asset classes. The first two variables are taken from the crypto assets, Bitcoin and Ethereum, and the remaining three variables for Gold, Crude Oil and VIX (Chicago Board Options Exchange's (CBOE) volatility index).  Our research strategy will be based on an analysis for unit root, optimal lag selection, coefficient matrix, checking VAR stability, the Granger causality test, and impulse response function (IRF). Our findings suggest that none of the indicators of traditional assets drive and explain Bitcoin. We also found that only Bitcoin is significantly related to Ethereum. while none of the other variables are statistically useful to explain the variation in the Ethereum. Based on these findings it can be recommended that the inclusion of crypto assets into a portfolio reduces risk because none of the indicators of crypto assets are significantly related to the indicators of traditional assets.

References

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Published

2024-03-06

Issue

Section

Articles

How to Cite

Nadeem, M. ., Shahzad, A. ., & Anwar, Y. . (2024). Impact of Crypto Assets as Risk Diversifiers: A VAR-based Analysis of Portfolio Risk Reduction. Bulletin of Business and Economics (BBE), 13(1). https://doi.org/10.61506/01.00173

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