Cryptocurrency-stock portfolio formation using the ADCC-GARCH Method
DOI:
https://doi.org/10.26905/afr.v8i2.17079Keywords:
Portfolio, Hedge, Cryptocurrency, LQ45 Index, ADCC-GARCHAbstract
The COVID-19 pandemic raised uncertainty in Indonesia’s financial markets, subsequently highlighting the importance of evaluating portfolio diversification strategies. This study examined the performance of dynamic portfolios: combining cryptocurrencies with stocks included in the LQ45 Index and compares hedged and unhedged portfolio performance across different market periods. The analysis used secondary data comprising daily closing prices of the LQ45 Index and five cryptocurrencies with substantial global market capitalization from January 2019 to November 2021. Dynamic portfolio construction is conducted using the asymmetric dynamic conditional correlation generalized autoregressive conditional heteroskedasticity (ADCC-GARCH) model. Portfolio performance is evaluated using the Sharpe Index, Treynor Index, Jensen Index, Sortino Ratio, and Omega Ratio. The findings indicate that differences in hedged and unhedged portfolio performance vary across evaluation periods and performance measures. During 2020, the difference in the Treynor Index is statistically significant at the 5% level, whereas the difference in the Jensen Index is significant at the 10% level. No statistically significant differences are observed for the Sharpe Index, Sortino Ratio, or Omega Ratio during the same period. These findings therefore suggest that the relative performance of cryptocurrency-equity portfolios depend on the market period and the performance measure employed. Accordingly, combining cryptocurrencies with the LQ45 Index does not necessarily yield consistently superior portfolio performance across all risk-adjusted measures.
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