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Cryptocurrencies and portfolio diversification in an emerging market

Lehlohonolo Letho (Department of Financial Governance, College of Accounting Sciences, University of South Africa, Pretoria, South Africa)
Grieve Chelwa (Development Finance Centre (DEFIC), University of Cape Town Graduate School of Business – Breakwater Campus, Cape Town, South Africa)
Abdul Latif Alhassan (Development Finance Centre (DEFIC), University of Cape Town Graduate School of Business – Breakwater Campus, Cape Town, South Africa)

China Finance Review International

ISSN: 2044-1398

Article publication date: 11 January 2022

Issue publication date: 1 February 2022

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Abstract

Purpose

This paper examines the effect of cryptocurrencies on the portfolio risk-adjusted returns of traditional and alternative investments within an emerging market economy.

Design/methodology/approach

The paper employs daily arithmetic returns from August 2015 to October 2018 of traditional assets (stocks, bonds, currencies), alternative assets (commodities, real estate) and cryptocurrencies. Using the mean-variance analysis, the Sharpe ratio, the conditional value-at-risk and the mean-variance spanning tests.

Findings

The paper documents evidence to support the diversification benefits of cryptocurrencies by utilising the mean-variance tests, improving the efficient frontier and the risk-adjusted returns of the emerging market economy portfolio of investments.

Practical implications

This paper firmly broadens the Modern Portfolio Theory by authenticating cryptocurrencies as assets with diversification benefits in an emerging market economy investment portfolio.

Originality/value

As far as the authors are concerned, this paper presents the first evidence of the effect of diversification benefits of cryptocurrencies on emerging market asset portfolios constructed using traditional and alternative assets.

Keywords

Acknowledgements

The authors are grateful for the constructive feedback from two anonymous reviewers, which improved an earlier version of the paper. All caveats apply.

Citation

Letho, L., Chelwa, G. and Alhassan, A.L. (2022), "Cryptocurrencies and portfolio diversification in an emerging market", China Finance Review International, Vol. 12 No. 1, pp. 20-50. https://doi.org/10.1108/CFRI-06-2021-0123

Publisher

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Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

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