Performance of the CoinShares Gold and Cryptoassets Index under different market regimes
File(s)
Published version
Author(s)
Koutsouri, Aikaterina
Petch, Michael
Knottenbelt, William
Type
Journal Article
Abstract
Regime-switching models are frequently used to explain the tendency of financial markets to change their behavior, often abruptly. Such changes usually translate to structural breaks in the average means and volatilities of financial indicators, and partition their time-series into distinct segments, each with unique statistical properties. In this paper, we address the problem of identifying the presence of such regimes in the constituents of diversified, cryptoasset-containing portfolios, ultimately to define high-risk market conditions and assess portfolio resilience. For each portfolio component, we first consider a Gaussian Hidden Markov Model (HMM) in order to extract intermediate trend-related states, conditional on the weekly returns distributions. We further apply a Markov-switching GARCH model to the demeaned daily returns to describe changes in the conditional variance dynamics and isolate volatility-related states. We combine the former approaches to generate a number of price paths for each constituent, simulate the portfolio allocation strategy and obtain a risk profile for each combination of the trend and volatility regimes. We apply the proposed method to the CoinShares Gold and Cryptoassets Index, a diversified, monthly-rebalanced index which includes two main risk-weighted components; a cryptoassets basket and physical gold. Results demonstrate an overall stable risk-reward profile when compared against the individual components and suggest a superior performance in terms of Omega ratio for investors that target wealth preservation and moderate annual returns. We detect underperformance regions in bear-low volatility market regimes, where diversification is hindered.
Date Acceptance
2021-01-21
Citation
Cryptoeconomic Systems, 1 (2)
Publisher
MIT Press
Journal / Book Title
Cryptoeconomic Systems
Volume
1
Issue
2
Copyright Statement
©2021 The Author(s)
License URL
Sponsor
CoinShares (Jersey) Limited
Identifier
https://cryptoeconomicsystems.pubpub.org/pub/koutsouri-cgci-performance/release/3
Grant Number
PO 4550183036
Publication Status
Published