International Review of Financial Analysis 89 (2023) 102785

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International Review of Financial Analysis

journal homepage: www.elsevier.com/locate/irfa

Diversification in financial and crypto markets

Myriam Ben Osman a, *, Emilios Galariotis b, Khaled Guesmi c, Haykel Hamdi d, Kamel Naoui a
a
University of Manouba-Tunis Higher School of Commerce, Tunisia
b
Audencia Business School, France
c
Paris School of Business, Paris, France
d
Faculty of Economics and Management of Tunis, Tunisia

A R T I C L E I N F O A B S T R A C T

Keywords: This article investigates the conditional value at risk (CVaR) of two portfolio optimiza- tion approaches con­
Bitcoin taining assets from the financial and crypto markets. We first catch the conditional interdependence structure
Cryptocurrency among each variable through the vine-copula-GARCH model before merging it with the Mean-CVaR model. We
Hedge
then optimize each portfolio and find out the optimal allocation while evaluating the precise risk. The results
Portfolio diversification
CVaR
indicate that the D-Vine copula is more suitable for both portfolios and that, when different conditional stock
Financial market indices information are being taken into consideration, the crypto-market components can act as a weak hedge/
safe haven against financial market indices. Furthermore, as CVaR is found to outperform the mean-variance of
Markowitz in both portfolios, both risk measures similarly show that when including cryptocurrencies in a
portfolio, the S&P 500 shall not be included. Additionally, the inclusion of Ethereum in a portfolio already
containing Bitcoin does not boost the return.

1. Introduction
As a peer-to-peer system based on an electronic ledger called
Blockchain technology, Bitcoin, known as well as XBT, has emerged as a
new tool that attracted the attention of investors all around the world.
The security of the algorithm as well as the low transaction costs made
the introduction of the digital age well welcomed since electronic cur­
rencies are used as a medium of exchange that is present exclusively
online; (Canh, Wongchoti, Thanh, & Thong, 2019). (Dwyer, 2015)
explained that it constitutes coins with a digital character and can be
used for payments from one party to another without the intervention of
a third party such as a financial institution. The authors also explained
that, since it hasn’t been presented through a particular government,
crypto-currencies are disconnected from the real economy. For that
reason, (Dyhrberg, 2016a) explained that it’s widely believed that the
financial crisis facilitated the acceptance of the digital tokens since this
disconnection makes them a shelter to market turmoil (Bouri, Gupta,
Tiwari, & Roubaud, 2017). However, invest- ing in digital tokens is
proven to be risky according to (Trucíos, Tiwari, & Alqahtani, 2020)
since their prices are extremely volatile. Yet, a growing interest from
investors is still shown to the cryptocurrency market (crypto-market,
hereafter) with short-term investors and speculators dominating this
new market; (Kyriazis, 2019). Following (Liu, 2019) work, one of the
components that contributed to draw the Medias’ attention, government
institutions as well as the financial industry is Bitcoin’s high trading
volume. Lots of academic research has been effectuated on this first
crypto-currency focusing on market efficiency (Urquhart, 2016), price
clustering (Urquhart, 2017), price volatil- ity (Dyhrberg, 2016a), and
transaction cost (Kim, 2017) while others started to look beyond Bitcoin
and after the diversification opportunities that are offered through Bit­
coin, in particu- lar, and the rest of the digital tokens, in general; (Liu,
2019). The author pointed out that this emerging market offers potential
diversification possibilities for institutional and retail investors since the
market has ample liquidity and the dynamics of certain crypto-
currencies are relatively isolated compared to others. Indeed, (Any­
fantaki & Topaloglou, 2018) studied the diversification possibilities of
Ethereum and underlined that, for risk-averse investors in the long run
perspec- tive, this crypto-currency is a good diversifier. The authors
explained this perspective by the fact that the Ethereum market is
separated from the equity and bond markets and presents unique
exceptional features. They also added that investors’ interest in the
whole crypto-market is due to the diversification benefits that it offers.
Moreover, (Corbet, Meegan, Larkin, Lucey, & Yarovaya, 2018) braced
the idea that the crypto-market represents a new investment asset class,

* Corresponding author.
E-mail address: Myriem.benosman@gmail.com (M.B. Osman).

https://doi.org/10.1016/j.irfa.2023.102785
Received 20 February 2023; Received in revised form 18 April 2023; Accepted 28 June 2023
Available online 7 July 2023
1057-5219/© 2023 Elsevier Inc. All rights reserved.
M.B. Osman et al.
with tokens being interrelated with each other but detached from the
traditional financial market. (Anyfantaki & Topaloglou, 2018) clarified
that, since it owns a low and negative correlation with the returns of the
traditional assets present in the financial market, the incorporation of
digital coins in a traditional portfolio may rise the return per unit of risk.
As more studies have proved the diversification benefits of XBT (Eisl,
Gasser, & Weinmayer, 2015), (Briere, Oosterlinck, & Szafarz, 2015), and
(Bouri, Molnár, Azzi, Roubaud, & Hagfors, 2017), (Mensi, Al-Yahyaee,
Al-Jarrah, Vo, & Kang, 2021) analyze the diversification benefits that
can be provided by a portfolio composed of eight popular crypto-
currencies and found that, by being a net transmitter of shocks, Bit­
coin, Ethereum, and Litecoin are a source of spillover. Besides, the au-
thors stipulated that adding XBT to a crypto-currency portfolio does not
drawback the risk and does not deliver diversification benefits. On the
flip side, (Platanakis, Sutcliffe, & Urquhart, 2018) studied whether naive
or optimal diversification, using four crypro-currencies (Bitcoin, Lite­
coin, Ripple, and Dash), will engender higher portfolio performance for
investors and found a negligible distinction in terms of anticipated
returns. Furthermore, the relationship among Bitcoin, Ripple, and
Litecoin with dif- ferent financial and commodity assets has been
inspected through the work of (Corbet et al., 2018) that grabbed evi­
dence of the short-run diversification benefits that can provide those
tokens to investors while underling their isolation from the financial and
economic assets. (Ma, Ahmad, Liu, & Wang, 2020) explored the diver­
sification effect on four traditional asset portfolios with the addition of
five crypto-currencies and found an increasing return and decreasing
volatility in all cases. Moreover, for the same level of risk, compared to
the traditional portfolio, crypto-currencies enhance the return and
provide diversification advantage, with Ethereum being the best diver­
sifier compared to XBT.
By the time this paper has been written, >9000 crypto-currencies
have been introduced to the world, but Bitcoin keeps its leading posi­
tion in terms of market capitalization, followed by Ethereum. Since in­
vestors diversify their portfolios with the aims of maximizing the returns
while minimizing the risks, we tend to look after the performance of two
portfolios that incorporates both financial and crypto market assets. We
first implement a portfolio composed of five financial stock indexes (S&P
500, Nasdaq, Dow Jones, FTSE 100, TSX) as well as Bitcoin and then
proceed with another one with the same financial components but with
the incorporation of Ethereum in addition to Bitcoin. Our motives comes
from the consensus that stipulates that cryp- tocurrencies are discon­
nected from the traditional financial market and are hence, separated
from conventional financial assets (Corbet et al., 2018) which make
them good diversification tools. However, as time went on, the prop­
erties of cryptocurrencies kept changing and with the appear- ance of the
sanitary crisis, the crypto and equity markets seem to be more interre­
lated. Hence, this study seek to detecting whether new opportunities for
portfolio diversification and hedging are offered through the crypto-
market componenets by incorporating Bitcoin in a portfolio com-
posed of exclusively stock market indexes before adding another digital
token in a second portfolio.
Our choice of the variables is inspired by several aspects. According
to (Charfeddine, Benlagha, & Maouchi, 2020), Bitcoin represents the
most used digital token when it comes to studies that look into the
financial dependence structure among cryptocurrencies and conven­
tional assets and their potential diver- sification benefits. The authors
add Ethereum to their study since both altcoins are efficient in attracting
sizable attention and devotion from market participants, including in­
vestors and port- folio managers, thanks to their innovative aspect,
decentralized system, immense flexibility, as well as their fast market
capitalization growth. Indeed, the market share of these two digital
coins surpasses 50% of the total market share for the crypto-market;
which highlights the high inter- est. of market participants in both to­
kens. The fact that cryptocurrencies have no intrinsic value (Cheah &
Fry, 2015) as well as the uncertainty that is emanating from their future
value makes their prices more volatile than stocks that are able to offer
2
International Review of Financial Analysis 89 (2023) 102785
more stable returns. However, Crypto’s price fluctuations might help to
make money much more quickly than the stock market’s longer hori­
zons, despite the probability of leading to significant short-term losses.
Indeed, investing in securities that track various indexes makes a good
long-term diversification investment for a port- folio. By adding some
fixed-income solutions, we are further hedging our portfolio against
market volatility and uncertainty. According to (Bouri, Lucey, & Rou­
baud, 2020), including cryptocurrencies to a port- folio composed of
equity components portrays diversification opportunities in contrast to a
solo solo equity portfolio. Moreover, just as stated by (Kumah & Odei-
Mensah, 2021) overexposure to cryptocurrencies can lessen the
“depth” and “width” of national stock markets as the unrestrained
volatility of cryptocurrency prices shift into riskier and more expensive
equity financing for local firms which motivated the study of the rela­
tionship among cryptocurrencies and the top five stock markets in terms
of market-cap by the time this article has been written. These five stock
indices have provided strong returns overtime and are all well-known
and widely followed since they pro- vide coverage of major markets.
Including these indices in the portfolio allows investors to gain exposure
to multiple markets and sectors, which can potentially enhance returns.
We first start by estimating the interdependence structure among the
assets returns that are composing each portfolio. Since vine Copula,
introduced by (Bedford & Cooke, 2002), allows the modeling of the
conditional dependence structure, we use it to model the conditional
interdepen- dence among the residuals of the return series. Our findings
start with the D-Vine Copula-GARCH model being the best fit for both
our portfolios after many pairs of copula have been applied. The con­
ditional interdependence shows that Bitcoin is a weak hedge against
FTSE 100, TSX, and Nas- daq while Ethereum is a weak hedge for only
the first two indices. While both digital tokens are caught being a hedge
and safe haven for the Dow Jones, Bitcoin is found to be a weak hedge
for S& P 500 in portfolio A and a hedge and safe haven in the second
portfolio.
Secondly, we apply the Markowitz mean-variance and the condi­
tional value-at-risk and com- pare which measure of risk is the best fit for
both our portfolios. For the first one, we realize that the CVaR outper­
form the mean-variance while, in the second portfolio, both risk mea­
sures give almost identical portfolio return for the same level of risk;
with CVaR slightly out-performing the mean-variance. Moreover, the
portfolio allocation shows that, when including Bitcoin in a portfolio,
there is no need to invest in the S&P 500 and the Dow Jones while when
adding two crypto-currencies, investors should be turning their back on
the S&P 500 and Nasdaq.
The insights portrayed in this study can be useful for policymakers,
investors, and other stake-holders to navigate the rapidly evolving
landscape of digital currencies and make informed decisions about their
use and adoption. The outcome can provide policymakers with valuable
information on the benefits and risks of cryptocurrencies and their
conditional interdependence with the financial markets. It can help
them to develop regulatory frameworks that balance the need for
innovation and consumer protection. Moreover, the research findings
can help investors make informed deci- sions about including digital
currencies in their investment portfolios. Indeed, since investors are
obligated to properly manage their portfolios, studying the opportu­
nities for portfolio managers to make diversification strategies using
cryptocurrencies is of great interest since this new digital market is a
very recent one and its properties keeps changing over time. Hence, our
study provide investors with major collection of empirical findings that
can assist them to better devise their investment strategies.
Our work complement the one of (Dyhrberg, 2016b) and (Bouri,
Molnár, et al., 2017) who looked after the hedging/diversifying prop­
erties of Bitcoin. However, this paper vary from previous ones in mul­
tiple aspects: 1. We analyze whether the top two cryptocurrencies in
term of market-cap can provide new opportunities for portfolio diver­
sification/hedging. 2. we are the first to apply the vine copula to look
after the conditional dependence in portfolios composed of both the
M.B. Osman et al.
equity and crypto markets components. 3. We are also the first to create
and compare two portfolios composed respectively of Bitcoin and
Bitcoin-Ethereum in addition to the financial stock indices.
The paper is remained as follows: Section 2 sums up the literature
review. Section 3 regroups the data and methodology for the construc­
tion of the vine-copula-GARCH model to optimize both our portfolios.
Section 4 constitutes the results and interpretation while section 5 en­
closes the conclusion.
2. Literature review
During recent years, the magnitude of growth of innovative tech­
nologies has driven the traditional global economies to accomplish some
restructuring; (Ma et al., 2020). According to the authors, with the up­
surge in the XBT price in 2017, investors who made transactions on this
digital coin got huge benefits from it. Consequently, the traditional
financial systems were shaken in many ways since the financial in­
termediaries, paperwork, and transactional delays are a part of the bur-
dens that investors need to deal with and are far from providing huge
plus values compared to the crypto-market. However, while (Franklin &
Gale, 1994) thought that portfolios risk are min- imized with financial
innovations, (Simsek, 2013b) and (Simsek, 2013a) stipulated that
speculation and innovative instruments, in contrast, highers it.
Indeed, (Baur, Hong, & Lee, 2018) showed that XBT isn’t correlated
to traditional assets and is firstly not a medium of exchange but a
speculative investment. While crypto-currencies investment was char­
acterized as risky due to the high volatility of the prices, many re­
searchers have looked into the diversification benefits of those digital
tokens. (Symitsi & Chalvatzis, 2019) even stipulated that the low risk
that comes from a portfolio owning XBT is due to the low correlations
that exist between this token and the remaining assets. (Pal & Mitra,
2019) investigated the hedging pos- sibilities of S&P500 composite price
index, gold, and wheat against Bitcoin price fluctuation and found that
gold provides the maximum hedging benefits. (Canh et al., 2019) looked
into the price dynamics and interconnectedness among seven large
cryptocurrencies to clarify if diversification between different tokens
can be efficient in lowering the specific risk. During the period going
from 2014 to 2018, the authors got a hold of structural breaks that
expand from lower market capi- talization cryptocurrencies to the larger
ones as well as a spillover among cryptocurrencies that are strongly and
positively correlated. Moreover, the authors conclude that the crypto-
market is lacking in terms of diversification.
(Selmi, Mensi, Hammoudeh, & Bouoiyour, 2018) looked into the
hedging, safe haven or/and diversification benefits that can be provided
by XBT against oil price fluctuation compared to gold. By using a
quantile-on-quantile regression approach, the authors get a hold of a
hedge, safe haven, and diversifier role of XBT and gold against oil price
fluctuation depending on distinct market conditions. (Katsiampa, 2019)
fo- cused on the co-movement among XBT and Ether and demonstrated a
connection among these two cryptos, highlighting that Ether is a hedge
to XBT. Additionally, (Borri, 2019) explained that high returns and
hedging benefits can be offered by a crypto-currency portfolio when
incorporated in investor’s portfolio. (Matkovskyy & Jalan, 2019)
explained that XBT receives shocks from the financial market and that
there is a contagion effect to XBT, while underling that during a crisis
period, investors that are risk-averse, favor investments in the financial
market rather than the XBT, characterized as too risky. (Yang & Hamori,
2021) focused on the faculty of the carbon market to be a safe haven or a
hedge against the crypto-market and found that it’s the case for the
European carbon market while it isn’t for the Chinese carbon market.
Some studies, such as (Baur et al., 2018), (Bouri, Jalkh, Molnár, &
Roubaud, 2017), and (Guesmi, Saadi, Abid, & Ftiti, 2019), point out the
positively weak correlation of XBT with the financial market globally,
highlighting it’s potential diversification advantage.
Focusing on the COVID− 19 pandemic period, (Goodell & Goutte,
2021) specify that the crypto-market doesn’t furnish diversification
3
International Review of Financial Analysis 89 (2023) 102785
advantage whether in normal market time or dur- ing turmoils. How­
ever, the authors stipulate that Tether constitutes an exception as the
digital token moves negatively with equity indexes in both market
states, highlighting that it constitutes a safe haven during market
downturns. (Nguyen, 2021), looked into the effect of the S&P 500 stock
market on XBT during COVID-19 market turmoil and found that it
significantly affects the XBT returns. (Briere et al., 2015) studied the XBT
potential in a portfolio diversification strategy and came to the
conclusion that including it, even in a small proportion, with traditional
and alter- native assets may reduce the risk and raise the return. (Kajtazi
& Moro, 2019) included Bitcoin in three portfolios present in three
different geographical locations and specified that it has the ability to
raise the returns more than lowering the risk of the portfolios.
Many authors have looked into the diversification benefits that can
result from a portfolio composed of cryptos which drives this study to
look into their incorporation into a portfolio com- posed of financial
stock markets indices. According to (Boubaker & Sghaier, 2013), the
modern portfolio theory asserts that, as long as the financial assets own
low correlation, investors can benefit from the diversification. Hence,
the linear correlation coefficient as well as the efficient portfolio shall be
describing the dependence among the financial return and should be
given by the traditional mean-variance optimization; (Markowitz,
1952). However, (Post & Van Vliet, 2005) and (Ang, Chen, & Xing,
2006) point out that variance is a symmetric measure that takes the
downside as well as the upside risk in the same way while the downside
risk is the most important one for investors. Hence, according to (Tsa­
fack, 2009), extreme risk when there is asymmetric depen- dence can be
underestimated. For that reason, (Markowitz, 1959) presented the semi-
variance as a downside risk measure while (Arzac & Bawa, 1977) takes
into account the value-at-risk to be able to take into consideration the
tail events. According to (Miskolczi, 2016), the Markowitz ap- proach
takes the variance as a risk measure but it may lead to incorrect con­
clusions when non elliptical distributions are being considered. Starting
from its introduction, several risk measures have been introduced,
including the Value at risk (VaR) model. However, as it does not meet
the subadditivity property, and ignores the severity of losses in the far
tail of the profit-and-loss distribution, it has been criticized since the risk
connected to a specific portfolio can be greater than the components
stand-alone risk; (Boubaker & Sghaier, 2013). All these elements drove
toward the Expected Shortfall, also called the Conditional Value at risk
(CVaR), as a downside risk estimation that was introduced to overcome
these issues. (Trucíos et al., 2020) points out that a suitable risk esti­
mation can ameliorate the trading strategies as well as the investment
decision. As cryptos are highly volatile, they are drawn to be highly risky
which makes the estimation of the suitable risk measure a first necessity.
To address the challenge of joint probability modeling, copula functions
have emerged as a potential solution. Specifically, the vine copula
specification, which utilizes a sequential method, maximum spanning
tree algorithm, and maximum likelihood estimation of pair-copula pa­
rameters, is being explored as an effective approach to model the de-
pendency structure between variables. Even today, copula functions
continue to be relevant in the context of the asset allocation problem. In
their research, (Mba, Pindza, & Koumba, 2018) employed the GARCH-
differential evolution t-copula method to optimize and evaluate cryp­
tocurrency portfolio risk and return in a multi-period setting. Similarly,
(Boako, Tiwari, & Roubaud, 2019) integrated copula functions into a
GARCH modeling approach to investigate the structural conditional
interdependencies among sev- enteen cryptocurrency prices and opti­
mize the portfolio’s Value-at-Risk (VaR). In a related study, (Mba &
Mwambi, 2020) utilized a two-state Markov-switching technique in
combination with R- vine copula and GARCH (MSCOGARCH) to model
heavy tail dependencies and structural breaks within the states of
Markov switching. The aim was to achieve maximum returns with
minimum conditional value-at-risk of a portfolio consisting of the top
ten virtual currencies in terms of market capitalization. All these authors
concluded that these portfolios owns very low VaR or Conditional VaR
M.B. Osman et al. International Review of Financial Analysis 89 (2023) 102785

and high return; which isn’t in line with the dynamics of the crypto- ( ( ))
( ) ∂ci,j Fi (xi ), Fj xj
market that is charac- terized as unregulated, highly volatile and fi|j xi xj = ( ) (2)
permanently subjected to extreme events according to (Tenkam, Mba, & ∂Fj xj
Mwambi, 2022). By merging the K-means clustering algorithm and Further explanation of the copula Vine model are present in the
GARCH C-Vine copula model with the differential evolution algorithm, appendix A.
(Tenkam et al., 2022) study optimized and selected a cryptoasset port­
folio. The authors found that this combined approach enables the con­ 3.2.2. Mean-CVaR optimisation model
struction of a diversified portfolio consisting of eight cryptocurrencies (Rockafellar & Uryasev, 2002) presented the CVaR, which is the
and determines an optimal allocation strategy to minimize the portfo­ expected losses that surpass, at some confidence level, the VaR, as
lio’s conditional value-at-risk while maximizing its return. Their find­ follow:
ings indicate that stable coins exhibit negative correlations with other [ / ]
crypto-assets in the portfolio and may serve as a safe haven for crypto- CVaRβ (L) = E L L ≥ VaRβ (L) (3)
investors during periods of market turbulence.
Knowing that the loss in a portfolio is presented as L = − y, where y is
Hence, we apply the pioneering work of (Markowitz, 1959) to
the return of the portfolio, β the confidence level, and VaRβ is the VaR at
construct two optimized portfolios containing cryptocurrencies, that
the β confidence level. The expected losses of the portfolio at the β
maximize the profits while minimizing the risks. We then proceed to
confidence level is presented by CVaRβ (y) that consider the number of
look into the optimized portfolio given by the conditional value-at-risk
potential losses when they surpass the VaRβ threshold; CVaRβ (y)
methodology and compare both results.
≥ VaRβ (y).
3. Data and methodology If we presume that there are n assets in a portfolio, then the position
∑
for each asset is X = (x1 , …, xn )T (where xi ≥ 0 (I = 1, …, n) and ni=1 xi =
( )T
3.1. Data 1) while Y = y1 , …, yn represents the asset return where the antici­
∑
pated return of the portfolio is ni=1 xi yi and the anticipated losses is −
This study regroups the daily price return in logarithm of five stock ∑n ∑n T
i=1 xi yi . f(X, Y) = − i=1 xi yi = X Y represents the loss function when
markets indexes that own the highest market capitalization and repre­ we suppose that Y owns a density P(Y).
sent the financial market as well as the top two crypto- currencies that Through a particular function Fβ (X, α), (Rockafellar & Uryasev,
represents the crypto-market. While the S&P 500 index (SPX), the 2002) merge the CVaR and the VaR and modify the minimizing CVaR
Nasdaq com- posite index (IXIC), the Dow Jones Industrial Average problem by changing it into minimizing a continuously differentiable
index (DJI), the Financial Times Stock Exchange 100 Index (FTSE 100), and convex function problem.
and the Toronto Stock Exchange composite index (TSX) data were
extracted from Investing.com, Bitcoin (XBT) and Ethereum (ETH) were y ∈ Rm
taken respectively from Yahoo finance and coinmarketcap.com. Our ∫
study was conducted from October 03, 2017, to October 25, 2021, and Fβ (X, α) = α +
1
[f(X, Y ) − α ]+ P(Y)dY (4)
accounted a total of 994 observations; knowing that we got rid of some (1 − β)
data to adjust the total number of observations since the stock indexes
VaRβ (X) ∈ argmin Fβ (X, α) (5)
data are accessible only on weekdays. Besides, the starting date was
chosen as the one where Bitcoin price started being extremely significant α∈R
before the huge price upward of December 2017. ( )
CVaRβ (X) = minFβ (X, α) = Fβ X, VaRβ (X) (6)
3.2. Methodology α ∈ R.
Knowing that [U]+ = max (U, 0) while Fβ (X, α) is continuously
3.2.1. Modeling multivariate dependence: Vine copula differentiable and convex with consideration to α. The simulation of a
Using a copula, we can unrelate the joint distribution into two set of Y under q distinct situations is possible if the density of Y is un­
separate ones: the marginal distri- butions of each variable and the specified by the Monte Carlo simulation. In the equation below, Fβ (X, α)
copula that merge these marginals into a joint distribution since it’s able approximation is presented as:
to express the joint distributions of two or more random variables. We
use C-vine and D-vine copulas, introduced by (Aas, Czado, Frigessi, &
q
∑
1 [ ]+
F̃β (X, α) = α + = − XT Y K − α (7)
Bakken, 2009), to look after the hedge and safe haven properties of each q(1 − β) k=1
chosen variable in this study.
In a C-vine copulas, each tree has a node that is unique and can join Hence, through the utilization of a CVaR to catch the position of
all the other nodes. The joint probability density function of d-dimension variance in mean-variance model, we build the mean-CVaR model:
for C-vine is, hence, presented as follow: Portfolio optimisation.
∑
{ ( ) } Min α + q(1−1 β) qk=1 uk
∏d ∏d− 1 ∏d− j
f (x1 , x2 , …, xd ) = fk (xk ) j=1 i=1 cj,j+i|1,…,j− 1 ( xj |x1 , ….xj− 1 )
k=1 F xj+i |x1 , …, xj− 1 ⎧ XT YT + α + uk ≥ 0
⎪
⎪
(1) ⎪
⎪
⎪
⎪
⎪ uk ≥ 0
⎪
Knowing that the conditional copula density is cj,j+1|1,..0.1–1 (where i ⎪
⎪
⎪ q
⎪ 1 T∑ K
⎪
and j are respectively the index that identifies the trees and the index ⎨ X Y ≥ρ
identifies the edges in each tree), the marginal density. S.t. q k=1 (8)
⎪
⎪
⎪
is denoted by fx (with k = 1, …,d), and the function that represent the ⎪
⎪
⎪ ∑ n
⎪
conditional distribution of the xi variable conditional is presented by ⎪
⎪
⎪
⎪
xi = 1
⎪
(Joe, 1997) as follow: ⎪ i=1
⎩
xi ≥ 0.

4
M.B. Osman et al. International Review of Financial Analysis 89 (2023) 102785

Knowing that investors’ anticipated return is noted by ρ while uti­
lizing the vine copulas- GARCH model, YK can be simulated through
Monte Carlo.
4. Results and interpretations
Table 1 resumes the descriptive statistics as well as the unit root tests
conducted on our variables. The results show a positive means for all our
series highlighting that, on average, all the data presents a positive re­
turn during our studied period (except for FTSE 100). The maximal re­
turn is attributed to Ethereum (14.9%) followed by Bitcoin (8%) while
the lowest is assigned to Ethereum (− 23%). The volatility, presented
through the standard deviation coefficient, is greater in the crypto-
market than in the financial market. On the flip side, the data exhibits
a left-skewed distribution which implies that the financial market and
the crypto-market have the propensity to engender negative returns
with pronounced probability. The kurtosis is >3 for all the series which
points out a leptokurtic distribution and the Q(20), referring to the
Ljung-Box statistics, underline the existence of an autocorrelation
problem except for the footsie. Moreover, the ARCH effect has been
noted present in all our series which means that heteroskedasticity and
volatility clustering exists. Hence, GARCH-models can be applied.
The suitable specification for modeling the volatility clustering,
heteroskedasticity as well as filtering the retard into an approximately i.
i.d series is chosen once the right GARCH model is found for each data.
Hence, we start by estimating three GARCH models (GARCH, E-GARCH,
and GJR-GARCH) for earch serie and found that the S&P 500, NASDAQ,
DOW JONES, TSX, FTSE 100, and Ethereum owns the ARMA(1,1)-GJR-
GARCH as the best specification while Bitcoin owns an AR(2) as the right
specification with the E-GARCH model; knowing that the information
criteria that we used for the model chose is the log likelihood. The results
are regrouped in Table 2.
The adjustment to past shocks, represented by α, is found to be low
and significant for the financial market as well as Bitcoin and Ethereum
while the volatility persistence, represented by β is, in mean, between
0.7 and 0.95 which indicates that the conditional volatility is depending
on the past and persevering over time.
Since the Vine-copula-GARCH models provide a flexible and
modular approach for modeling multivariate dependencies, we firstly
apply them on the standardised residuals of each portfolio component to
bring out the connectedness structure among the variables. The models
are used as they can capture a wide range of dependence structures,
including asymmetry and tail dependence, and are computationally
efficient to estimate. By accurately modeling the complex dependence
structure between variables, vine-copula-GARCH models can improve
forecasting accuracy and support better risk management and decision-
making. Following (Czado, Schepsmeier, & Min, 2012), we perform the
sequential maximum likelihood estimation to get the original C-vine and
D-vine copulas values. Hence, different ranges of copulas are engaged in
this study (the Gaussian copula, the t-copula, Clayton copula, survival
Gumbel, survival Clayton, rotated Gumbel copula, and rotated Joe cop-
ula) in order to select the most appropriate one for each pair of variables;
knowing that the selection is based on the lowest AIC. Secondly, we
apply the maximum likelihood estimation (MLE) to es- timate the final
variables of the pair-copulas.
Using the LL, AIC, and BIC criteria, we select the perfect vine copulas
fit for each portfolio. The results are regrouped in Table 3 where we
estimate that, for both portfolios, the D-vine is the most suitable
structure.
Once the suitable vine model has been chosen, we plot the tree
structure of our selected vine copula results in Tables 4 and 5 for port­
folios A and B. The estimation results provide us a repre- sentation of the
nexus among the variables composing two portfolio strategies; knowing
that the Kendall’s tau allows us to know the estimated dependence and
constitutes the selection criteria. Following (Talbi, Bedoui, de Peretti, &
Belkacem, 2021), we put the condition that a variable is designated as a
weak/strong hedge if the Kendall tau value is positive and close by zero
for the first case and negative or equal to zero in the second one.
Five dimensional D-vine tree results are displayed in Table 4 where
all pairs of variables exhibit a positive dependence at a different level.
The lowest dependence, which is almost equal to zero, is shown through
the Survival Joe copula in the first root node that represents the footsie
and Bitcoin. This result indicates that Bitcoin may serve as a weak hedge
against the British stock market. Meanwhile, the dependence of the two

Table 1
Descriptive statistics and unit root test.
SPX IXIC DJI TSX FTSE 100 XBT ETH

Descriptive statistics
Mean 0.000258 0.000371 0.000201 0.000133 -1.29E-05 0.001164 0.001160
Median 0.000535 0.000602 0.000466 0.000355 0.000293 0.001203 0.000706
Maximum 0.038949 0.038804 0.046749 0.049051 0.037639 0.088318 0.149191
Minimum − 0.055439 − 0.057107 − 0.060114 − 0.057223 − 0.049998 − 0.215965 − 0.239172
Std. Dev. 0.005800 0.006518 0.006087 0.005082 0.005003 0.022062 0.028087
Skewness − 1.073119 − 0.924659 − 1.095565 − 2.099914 − 1.295823 − 1.037340 − 0.692528
Kurtosis 21.91675 14.64462 24.53464 47.84076 19.76989 14.08471 10.76423
Jarque-Bera 14,996.35 5751.834 19,385.92 83,922.24 11,913.75 5261.870 2573.590
Probability 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000
Sum 0.256612 0.368578 0.199908 0.132032 − 0.012798 1.156034 1.151636
Sum Sq. Dev. 0.033369 0.042143 0.036751 0.025623 0.024834 0.482823 0.782555
Q(20) 357.8*** 216.6*** 376.9*** 307.7*** 66.7 28.8* 32.7**
Q2(20) 1541.3*** 1196.4*** 1437.5*** 1254.7*** 607.7 19.8 37.7***
ARCH 71.6** 55.59** 67.29** 55** 36.32** 2.84* 2.72**
Unit root tests
ADF test − 9.397*** − 10.16*** − 9.635*** − 9.650*** − 32.20*** − 20.64*** − 20.83***
PP test − 39.28 *** − 38.99*** − 38.51*** − 38.20*** − 32.19*** − 33.42*** − 33.25***
Observations 993 993 993 993 993 993 993

Note: SPX, IXIC, DJI, SPTSX, FTSE 100, XBT, and ETH designates respectively the S&P 500 index, the Nasdaq composite index, the Dow Jones Industrial Average index,
the Toronto Stock Exchange composite index, the Financial Times Stock Exchange 100 Index, Bitcoin, and EthereumThe Jarque-Bera statistic tests the normality while
the Ljung box (Q(20)) statistics tests for autocorrelation and ARCH is the LM test for heteroskedasticity. ADF and PP are the unit root tests and represents the
Augmented Dickey-Fuller and the phillips-perron tests introduced respectively by (Dickey & Fuller, 1979) and (Phillips & Perron, 1988).

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M.B. Osman et al. International Review of Financial Analysis 89 (2023) 102785

Table 2
Estimation outcome and diagnostic tests of the marginal distribution model.
SPX IXIC DJI TSX FTSE 100 XBT ETH

Panel A: Estimation results

C 0.0004708 0.000585 0.0003539 0.0002079 0.0001499 0.00085 0.001115
AR(1) 0.809123 –0.237534 -0.531702 0.810062 0.651597 − 0.053566 -0.824399
AR(2) 0.067589
MA(1) − 0.849214 0.183636 0.492614 − 0.769184 − 0.706458 0.773467
ω * 10− 6 0.879301 1.173755 0.879420 0.327162 0.487700
ω * 10− 4 19,937 0.998745
α 0.095378 0.019492 0.067982 0.029025 0.026592 − 0.051915 0.207101
β 0.731546 0.805745 0.763925 0.785079 0.902245 0.990043 0.801947
θ1 2.150773
θ2 12.050611
γ 0.301592 0.280331 0.282930 0.317879 0.089383 − 0.048063
v 5.247557 5.421472 5.419718 7.749370 4.445616 2.000212 2.670913

Panel B: Diagnostic tests for standarlised residuals

Kurtosis 3.5850 5.1798 2.3467 1.5169 2.8514 23.853 6.1740
Skewness − 0.99389 − 1.21 − 0.71031 − 0.68725 − 0.66837 − 1.1341 − 0.51355
Jarque-Bera 695.24 1352.4 311.35 173.38 410.33 23,755 1620
Q(20) 20.6499 21.4540 18.2497 13.4803 14.2855 26.6192 25.0815
ARCH 1.2176 0.24998 1.4236 0.48094 0.57900 2.3028 2.0866

Note: SPX, IXIC, DJI, SPTSX, FTSE 100, XBT, and ETH designates respectively the S&P 500 index, the Nasdaq composite index, the Dow Jones Industrial Average index,
the Toronto Stock Exchange composite index, the Financial Times Stock Exchange 100 Index, Bitcoin, and Ethereum.

between the Nasdaq composite and the Dow Jones conditional the
Table 3
Standard Poor’s stock index. These results indicate, for the first one, that
Vine copula model selection.
the information emanating from the British stock market can help in­
Portfolio A vestors to use Bitcoin as a weak hedge against the Canadian stock market
C-Vine D-Vine Choice while, for the second one, the information coming from the American
LL 2523.81 2586.19 D-Vine stock market can help investors to use Dow Jones as a strong hedge and
AIC − 4999.63 − 5124.38 safe haven against the Nasdaq.
BIC − 4882.03 − 5006.79 In the third tree, we catch another negative dependency stated by the
Portfolio B rotated Tawn type 1 copula (90 degrees) among the Dow Jones and
LL 3078.06 3098.96 D-vine
AIC − 6092.11 − 6139.92
Bitcoin conditional TSX, and FTSE 100 and a third one among the S&P
BIC − 5935.32 − 5997.83 500 and FTSE100 conditional the Dow Jones and the TSX which is
represented by the student copula. This implies that, for the first case,
Bitcoin acts as a hedge and safe haven against the Dow Jones when in­
pairs that follow is represented by the BB1 copula which exhibits vestors are using informations emanating from the British and Canadian
respectively a dependency of 0.33 among the British and Canadian stock stock markets while, for the second case, the British stock market is
market and a one of 0.47 among the Dow Jones and the Canadian stock hedging the S&P 500 when information from the Dow Jones and TSX are
exchange. The highest depen- dency is found among the S&P 500 and being considered. The fourth tree, on another hand, exhibits two root
the Dow Jones (0.75) followed by the S&P 500 and Nasdaq composite nodes with respectively a low positive dependency among the S&P 500
(0.73) and are both represented by the survival BB1 copula. and Bitcoin conditional on Down Jones, TSX, and FTSE100 and a
For the second tree, the lowest dependence is given by the survival negative weak dependency between the Nasdaq and FTSE100 condi­
Gumbel copula and is at- tributed to the Canadian stock market and tional on S&P 500, Dow Jones, and TSX. Both the nodes are respectively
Bitcoin conditional on the British stock market while a negative presented through the Gaussian copula and the rotated Tawn type 1
dependence of − 0.37 has been noted through the student copula

Table 4
D-Vine Copula tree for Portfolio A.
tree edge family cop par par2 tau utd ltd

1 4,6 16 SJ 1.09 0.00 0.05 – 0.11

5,4 7 BB1 0.50 1.19 0.33 0.21 0.32
3,5 7 BB1 0.76 1.37 0.47 0.34 0.51
1,3 17 SBB1 0.21 3.57 0.75 0.39 0.79
2,1 17 SBB1 0.12 3.48 0.73 0.18 0.78
2 5,6;4 14 SG 1.07 0.00 0.06 – 0.08
3,4;5 2 t 0.26 12.73 0.17 0.01 0.01
1,5;3 1 N 0.31 0.00 0.20 – –
2,3;1 2 t − 0.54 14.23 − 0.37 0.00 0.00
3 3,6;5,4 124 Tawn90 − 13.91 0.00 − 0.00 – –
1,4;3,5 2 t − 0.04 8.91 − 0.02 0.01 0.01
2,5;1,3 14 SG 1.06 0.00 0.06 – 0.08
4 1,6;3,5,4 1 N 0.04 0.00 0.03 – –
2,4;1,3,5 134 Tawn270 − 20.00 0.00 − 0.00 – –
5 2,6;1,3,5,4 5 F 0.38 0.00 0.04 – –

Note: In the edge column, the numbers 1,2,3,4,5 and 6 represents respectively the S&P500, Nasdaq composite, Dow jones industrial Average, FTSE100, TSX, and
Bitcoin.

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M.B. Osman et al. International Review of Financial Analysis 89 (2023) 102785

Table 5
D-Vine Copula tree for Portfolio B.
tree edge family cop par par2 tau utd ltd

1 6,5 3 C 0.19 0.00 0.09 – 0.02

7,6 18 SBB6 1.24 2.15 0.59 – 0.70
1,7 3 C 0.21 0.00 0.10 – 0.04
3,1 17 SBB1 0.21 3.57 0.75 0.39 0.79
2,3 14 SG 2.18 0.00 0.54 – 0.63
4,2 2 t 0.41 6.50 0.27 0.12 0.12
2 7,5;6 1 N 0.10 0.00 0.07 – –
1,6;7 5 F − 0.22 0.00 − 0.02 – –
3,7;1 33 C270 − 0.05 0.00 − 0.02 – –
2,1;3 2 t 0.85 14.45 0.64 0.28 0.28
4,3;2 17 SBB1 0.12 1.20 0.22 0.01 0.22
3 1,5;7,6 7 BB1 0.63 1.50 0.49 0.41 0.48
3,6;1,7 36 J270 − 1.04 0.00 − 0.02 – –
2,7;3,1 114 Tawn180 4.47 0.00 0.00 – 0.00
4,1;2,3 6 J 1.04 0.00 0.02 0.06 –
4 3,5;1,7,6 5 F 0.54 0.00 0.06 – –
2,6;3,1,7 5 F 0.44 0.00 0.05 – –
4,7;2,3,1 2 t 0.04 10.08 0.02 0.01 0.01
5 2,5;3,1,7,6 14 SG 1.06 0.00 0.06 – 0.08
4,6;2,3,1,7 5 F 0.14 0.00 0.02 – –
6 4,5;2,3,1,7,6 1 N 0.25 0.00 0.16 – –

Note: In the edge column, the numbers 1,2,3,4,5,6, and 7 represents respectively the S&P500, Nasdaq composite, Dow jones industrial Average, FTSE100, TSX, Bitcoin,
and Ethereum.

copula (270 degrees). For the first node, this result shows that Bitcoin is
assigned as a weak hedge against the S&P 500 when investors are using
information from the Dow Jones, TSX, and FTSE100 stock markets while
the FTSE100 is a hedge against the Nasdaq when investors are utilizing
information from the S&P 500, Dow Jones, and TSX. The final tree ex­
hibits a weak positive dependence through the Frank copula among the
Bitcoin and Nasdaq conditional on the remaining stock markets. All
these results clarify that Bitcoin is clearly a weak hedge against the
financial stock market when investors are utilizing different stock
market information.
Our results bring new insights to (Bouri, Jalkh, Molnár, and Rou­
baud, 2017) work that estimated that Bitcoin acts as a diversifier for the
UK and US stock markets. Even though the dependence is found to be
positive in both their work and ours, we estimate that, since the values
are close to zero, they are more characterized as a weak hedge than a
diversifier. However, it’s half in line with the finding of (Dyhrberg,
2016b) that stipulated that Bitcoin is a good tool to hedge against the
100 largest companies listed on the London stock exchange.
Table 5 regroups the results of a six-dimensional D-vine tree related
to portfolio B. In the first tree, the lowest dependency is structured
among the Bitcoin and Canadian stock market (0.09) followed by S&P
500 and Ethereum (0.10) both represented by Clayton Copula. The re­
sults en- lighten respectively the weak hedge characteristic of Bitcoin
and Ethereum toward respectively the Canadian stock market and the
S&P 500. While the FTSE and Nasdaq exhibit a dependency of 0.27 and
the Nasdaq and Dow Jones exhibits one of 0.54, Bitcoin and Ethereum
shows a de- pendency of 0.59 which is quite high and is in line with the
findings of (Boako et al., 2019) that showed that among some crypto­
currencies, the dependence between Bitcoin and Ethereum is one of the
highest since they are the highly liquid cryptos and are the most capi­
talized ones. Nerve- less, the highest dependency (0.75) is exhibited
through the survival BB1 copula and is portrayed among S&P 500 and
the Dow Jones. Our results concord with (Chan, Le, & Wu, 2019) that
found that Bitcoin can be a hedge against the TSX as well as the results of
(Meshcheryakov, Ivanov, et al., 2020) and (Będowska-Sójka & Kliber,
2021) that approved that Ethereum is a hedge against the S&P 500 stock
market.
For the second tree, a weak positive dependency is registered in the
first root node through the Gaussian Copula for the Canadian stock
market and Ethereum conditional on Bitcoin. Hence, Ethereum can be
used by investors as a weak hedge against the TSX when they are
utilizing Bitcoin’s market information. Moreover, the second and third
node is exhibiting a negative dependency among the S&P 500 and Bit­
coin conditional on Ethereum as well as Dow Jones and Ethereum
conditional on S&P 500 which includes that, in the first case, Bitcoin acts
as a hedge and safe haven against the S&P 500 - which is in line with
(Chan et al., 2019) and (Będowska-Sójka & Kliber, 2021) works- when
investors are utilizing the Ethereum market in- formation while Ether­
eum acts as a hedge and safe haven against the Dow Jones when in­
vestors are utilizing information from the S&P 500 stock market.
Regarding the third three, the second and third nodes are exhibiting
a negative and null de- pendency through respectively the Rotated Joe
270 degrees and Rotated Tawn type 1180 degrees copulas. The out­
comes highlight respectively that Bitcoin acts as a hedge and safe haven
against the Dow Jones when information from the S&P 500 and Ether­
eum markets are considered while Ethereum acts as a hedge and safe
haven against the Nasdaq when information from the S& P 500 and Dow
Jones stock markets are being used. On the fourth tree, the dependency
is found to be weakly positive on average with the weakest one being
among Ethereum and the British stock market conditional on Nasdaq,
Dow Jones, and S&P 500 followed by Bitcoin and Nasdaq condi- tional
on Dow Jones, S&P 500, and Ethereum. Hence, Ethereum and Bitcoin
acts respectively as a weak hedge against the British stock market and
the Nasdaq when the conditional market information are being
considered.
For the remaining trees, the dependence is found to be low with the
lowest one among FTSE100 and Bitcoin conditional Nasdaq, Dow Jones,
S&P 500, and Ethereum; concluding that when conditional markets
information are being utilized by investors, Bitcoin is a weak hedge
against the British stock market, which is again in line with (Dyhrberg,
2016b) findings and close to (Będowska-Sójka & Kliber, 2021) that
found Bitcoin as a weak hedge against the FTSE 250.
Once the appropriate copulas have been established (D-vine copula-
GARCH for both portfo- lios), we build the mean CVaR in order to get the
portfolio optimization. We start as follow:
1. Samples of uk with k = 1, …,n should be simulated from D-vine
copula for both portfolios.
2. uk should be converted to student’s distribution zk, for each k, uti­
lizing the inverse of the distribution function of each variable: the
quantile function: zk = F − 1(uk).

7
M.B. Osman et al.
3. The standard deviation σ k,t should be generated utilizing ARMA-
GARCH model.
4. The monthly log return is simulated utilizing D-vine copula-GARCH
for both portfolios:
∑
m ∑
n IXIC
Rsim
k,t a0 +
=̂ a i Rk,t− i +
̂ ̂
b i ϵk,t− i + ϵt
i=1 i=1
where ϵt = zkσk,t.
The above numbers must be replicated 10,000 times to obtain the
portfolio returns. At the confidence level of α = 99%, we hence apply the
mean-CVaR model utilizing the reproduced data to get the portfolio
optimization.
Table 6 discloses the minimum variance portfolio weights of Mar­
kowitz while applying the re- turns resulting from D-vine copula-GARCH
model for both portfolios A and B. The results show that, for portfolio A,
the weight allocation grants the highest allocation to Bitcoin (38%)
followed by FTSE 100 (23%). The Nasdaq, TSX, and Down Jones should
be taken respectively with a proportion of 15%, 12%, and 10% while the
S&P500 should not be incorporated in the portfolio. For portfolio B,
while similar results to the first portfolio have been found for S&P 500,
we register that the highest portfolio allocation should also be attributed
to Bitcoin (26%) followed by Nasdaq and FTSE100 with a mean of
20.8%. According to the weights of Markowitz, Ethereum should be
incorporated with a proportion of 15%, Dow Jones with 10%, and TSX
with 6%.
The practical tool for guiding investors in selecting the best portfolio
and set of parameters is the efficient frontier, which represents the
optimal trade-off between risk and return for a given set of assets. The D-
vine copula-GARCH-CVAR model can be used to construct the efficient
frontier by estimating the parameters of the model using historical data,
simulating the joint dis- tribution of returns, and computing the port­
folio’s expected return and risk for various allocation strategies. To
achieve this objective, the D-vine copula-GARCH-CVAR model employs
several steps. First, it models the dependence structure between the
assets using a D-vine copula. Next, the GARCH model is used to estimate
the conditional volatility of each asset, which is used to compute the
conditional correlation matrix. This matrix is then used as input to the D-
vine cop- ula to simulate the joint distribution of returns. Finally, the
conditional value-at-risk (CVaR) is calculated to estimate the portfolio’s
risk, and the efficient frontier is constructed by varying the portfolio
weights for different levels of risk. By analyzing the efficient frontier
obtained from the D-vine copula-GARCH-CVAR model, investors can
identify the optimal portfolio that minimizes the portfolio’s risk for a
given level of return or maximizes the return for a given level of risk. The
model also allows for sensitivity analysis of different parameters, such as
the copula type or the GARCH model’s parameters, to determine the
impact of such changes on the portfolio’s risk-return trade-off. Hence,
we perform the CVaR estimation and the results of the minimum CVaR
Portfolio allocation for portfolios A and B are displayed in Table 7. The
outcome show that, for portfolio A, the weight allocation grants the
highest allocation to the Nasdaq (41%) followed by FTSE 100 (35%),
Table 6
Minimum variance portfolio weights of Markowitz.
Weights portfolio A Weights portfolio B
SPX 0.0000 0.0000
IXIC 0.1521 0.2134
DJI 0.1042 0.1064
FTSE 100 0.2322 0.2040
TSX 0.1235 0.0636
XBT 0.3879 0.2617
ETH 0.1505
Note: SPX, IXIC, DJI, TSX, FTSE 100, XBT, and ETH designates respectively the
S&P 500 index, the Nasdaq composite index, the Dow Jones Industrial Average
index, the Toronto Stock Exchange composite index, the UK Financial Times
Stock Exchange 100 Index, Bitcoin, and Ethereum.
International Review of Financial Analysis 89 (2023) 102785
Table 7
Minumum CVaR portfolio weights using D-vine copula for portfolio A and B.
weights portfolio A weights portfolio B
SPX 0 0
0.4152 0
(9) DJI 0 0.2249
FTSE 100 0.3581 0.3834
TSX 0.0257 0.0936
XBT 0.2010 0.2198
ETH 0.0782
Note: SPX, IXIC, DJI, SPTSX, FTSE 100, XBT, and ETH designates respectively
the S&P 500 index, the Nasdaq composite index, the Dow Jones Industrial
Average index, the Toronto Stock Exchange composite index, the UK Financial
Times Stock Exchange 100 Index, Bitcoin, and Ethereum.
and Bitcoin (20%). The TSX owns the lowest weight (2%) while the
S&P500 and Dow Jones should not be incorporated. Comparing the
outcomes of Tables 6 and 7, we can see that the minimum variance
portfolio of Markowitz isn’t equivalent to the minimum CVaR, since
each test takes a different measure of risk. Bitcoin and TSX allocation
decrease by 18.69% and 9.78% in Table 7 compared to Table 6 while the
Nasdaq and FTSE 100 increases respectively by 26.31% and 12.59%.
For portfolio B, with the incorporation of Ethereum, we find that the
S&P500, as well as Nasdaq, should be taken with a proportion equal to
zero while the FTSE100 takes the highest weight of 38% followed by
Dow Jones (22%) and Bitcoin (21%). The lowest proportions are
attributed to TSX (9%) and Ethereum (7%).
Both mean-variance and CVaR present similarities when it comes to
the S&P 500. Indeed, it seems that when cryptocurrencies are being
added to portfolios, the Standard and poor’s stock index shall not be
considered, independently of the measured risk. (Conlon & McGee,
2020) ex- plained that the inclusion of Bitcoin in a portfolio containing
the S&P 500 rises the downside risk in times of crisis. The similarity of
results in Tables 6 and 7 highlights that whether the crypto-market is
concerned, US investors tend to turn their backs to the US stock index
that is based on the 500 top companies listed in the NYSE as both
markets seem to be equivalent.
By comparing the D-vine copula-GARCH-CVAR model’s efficient
frontier to the Markowitz ef- ficient frontier, we can assess whether the
proposed approach leads to improved risk-return trade- offs and better
portfolio diversification. Furthermore, such a comparison provides in­
sights into the strengths and weaknesses of the D-vine copula-GARCH-
CVAR model relative to traditional portfolio optimization techniques.
Hence, to choose which of the Markowitz or the CVaR is the most effi­
cient portfolio at minimizing the risk and optimizing the returns, we
take a look at Figs. 1 and 2. The first figure is related to portfolio A where
we can see that for the same level of risk, the CVaR outperform Mar­
kowitz in terms of portfolio return. However, on average, for a level of
risk equal to 1%, the portfolio return is 51% in mean.
However, in Fig. 2, we can see that the CVaR and the mean-variance
of Markowitz are almost similar in terms of returns for a particular level
of risk. This result highlights that, even though both models takes a
different risk measure, they tend to give us the optimized portfolio re­
turn independently of the measured risk. However, we can slightly see
that at some risk levels, the CVaR still outperform the Markowitz in
portfolio B. Moreover, for a 1% risk, we consider that the second port­
folio brings a return of 50% in mean. Hence, the inclusion of Ethereum
to a portfolio already containing Bitcoin seems to not boost the return.
5. Conclusion
In this paper, we use a GARCH type model as well as a Vine copulas
to apply the CVaR optimiza- tion approach in order to get a hold of the
optimal asset assignment when we first include Bitcoin in the first
portfolio and then Bitcoin and Ethereum on the second one.
Before starting the CVaR estimation, we arrange our data so that they
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M.B. Osman et al. International Review of Financial Analysis 89 (2023) 102785

Fig. 1. Efficient frontier using D-vine copula-GARCH-CVaR model versus Markowitz efficient frontier for portfolio A.

Fig. 2. Efficient frontier using D-vine copula-GARCH-CVaR model versus Markowitz efficient frontier for portfolio B.

fit an ARMA-GARCH type of model. We hence start examining the
multivariate dependence structure by utilizing the copula theory. Next,
we utilize the sequential estimation procedure and conduct the multi­
variate analysis through the estimation of both C-Vine and D-vine cop­
ulas. After choosing the appropriate Vine model that owns the minimum
AIC and BIC information criteria value, we proceed by estimating the
copula-GARCH model in order to canalize the portfolio’s risks more
precisely before merging it with a Monte Carlo simulation as well as
mean-CVaR model to boost our two portfolios.
Our findings characterize the D-vine as the best model to estimate the
interdependence structure among the six variables that constitute the
first portfolio as well as the seven ones that constitute the second one.
Bitcoin and Ethereum are found to share similarities in their hedge
property to- ward the Dow Jones and weak hedge property against the
footsie and the Canadian stock market. Furthermore, our findings shed
light on Bitcoin acting as a weak hedge against the Nasdaq and S&P500.
On another hand, when estimating two different measure of risk, we
observe that the CVaR measure of risk outperform the mean variance
which leads us to conclude that the D-Vine Copula-GARCH-CVaR model
gives us better performance for both our constructed portfolios.

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M.B. Osman et al. International Review of Financial Analysis 89 (2023) 102785

Moreover, we find that when investors are having a choice between the
S&P 500, Dow Jones, and Nasdaq in front of Bitcoin and/or Ethereum,
they tend to invest on only one US stock index, with S&P 500 being
deselected in both cases. Hence, when adding S&P 500 to portfolios
comporting cryptocurrencies, we find that the allocation is null high­
lighting that for American investors, S& P 500 and Bitcoin/Ethereum are
equivalent in portfolio strategies. Indeed, when investing in Bit- coin,
it’s more interesting for investors to put the highest proportion in Nas­
daq composite which is the largest US stock exchange among the three
ones under study and is, hence, more diversified. However, when we add
Ethereum in a second portfolio, which will automatically level up the
risk, it’s interesting for investors to go for the Dow Jones that is based on
30 major industry companies as it’s easier to predict its fluctuation
compared to the remaining two others. It also occurs that when adding
Ethereum to a portfolio already containing Bitcoin and five financial
market indices, the return isn’t necessarily going upward. On the con­
trary, the first portfolio performance is found to surpass the second one
for the same level of risk.
In terms of portfolio and risk management decisions, our work can
insight investors that are in- clined on taking hedging positions utilizing
the crypto-market tokens. Indeed, our work spot out different parame­
ters that can take place in enlarging the risk related to conditional de­
pendency as well as investment risk strategies. Moreover, it’s important
for investors, hedge funds, traders and market makers to be able to hold
an appropriate estimation of risk measures which will lead to a better
risk management and an improvement in investment decisions and
trading strategies.

Appendix A

A d-dimensional C-vine copula with d nodes and d(d 1)/2 pair-copulas are set-out on d 1 trees. According to (Bedoui, Noiali, & Hamdi, 2020), a 4D
C-vine density decomposition and its hierarchical tree structure is illustrated in the equation that follows :
( ( ( ( (
f (x1 , x2 , x3 , x4 ) =c1,2 F1 (x1 ), F2 (x2 ).c1,3 F1 (x1 ), F3 (x3 ).c1,4 F1 (x1 ), F4 (x4 ).c2,3|1 F2|1 (x2 |x1 ), F3|1 (x3 |x1 ).c2,4|1 F2|1 (x2 |x1 ), F4|1 (x4 |x1 ).c 3, 4∣1, 2(F 3∣1,
(10)
2(x 3|x 1,x 2),F 4∣1, 2(x 4|x 1,x 2) .f1 (x1 ).f2 (x2 ), f3 (x3 ).f4 (x4 )

Each tree in a D-vine copulas owns a path structure means a node that is attached symmetrically, (see Fig. 3). It is an R-vine copula with a joint
probability density function of d-dimension presented as follow:
∏d ∏d− 1 ∏d− j { ( ) }
xj |x1 , ….xj− 1 )
f (x1 , x2 , …, xd ) = f (x
k k ) cj,j+i|1,…,j− 1
( (11)
k=1 j=1 i=1 F xj+i |x1 , …, xj− 1

Knowing that ci,i+j|(j+1),…,i+j− 1 designates the marginal densities (k = 1,…,d) and is a bivari- ate copulas density. The 4D D-vine density decom­
position and its hierarchical tree structure is presented as follows:
( ( ( (
f (x1 , x2 , x3 , x4 ) =c1,2 F1 (x1 ), F2 (x2 ).c2,3 F2 (x2 ), F3 (x3 ).c3,4 F3 (x3 ), F4 (x4 ).c1,3|2 F1|2 (x1 |x2 ), F3|2 (x3 |x2 ).c 2, 4∣3(F 2∣3(x 2|x 3,F 4∣2, 3(x 4|x 2,x 3)c 1, 4∣2, 3(F 1∣2,
(12)
3(x 1|x 2,x 3,F 4∣2, 3(x 4|x 2,x 3) .f1 (x1 ).f2 (x2 ), f3 (x3 ).f4 (x4 )

The sequential estimation procedure of a vine copulas presented by (Czado et al., 2012) is based firstly on the parameters of the unconditional pair-
copulas that are estimated in the first tree and then utilized to estimate the second trees’ parameters of the conditional pair-copulas. This approach is
replicated up to the estimations of all the parameters of pair-copulas are done. Finally, as a starting value to compute the MLE of the vine copulas, the
sequential estimates are used.
If d variables at T time points are noted, xi = (xi,1, …, xi,T) is assumed with i = 1, …, d and the log-likelihood for C-vine (see Fig. 4) is presented as
follow:
∑ d− j ∑
d− 1 ∑ T ( ( ( ) ))
F( xj,t |x1,t , …, xj− 1,t ,)
lnf (x) = ln cj,j+|1,…,(j− 1) (13)
j=1 i=1 t=1
F xi+j,t |x1,t , …, xj− 1,t

Knowing that θj,i is the parameter of the copula density cj,j+i|1, …,(j− 1). Moreover, the log- likelihood for D-vine is presented as follow:
∑ d− j ∑
d− 1 ∑ T ( ( ( ) ))
F( xi,t |xi+1,t , …, xi+j− 1,t ),
lnf (x) = ln ci,j+i|1+i|,…,(i+j− 1) (14)
j=1 i=1 t=1
F xi+j,t |xi+1,t , …, xi+j− 1

Knowing that the set of parameters of the corresponding copula density cj,j+i|1+i,…,(i+j− 1) is represented by θj,i.
We follow (Joe & Xu, 1996) on the computation of the conditional distribution:

Fig. 3. 4D C-vine structure with three trees and six edges.

10
M.B. Osman et al. International Review of Financial Analysis 89 (2023) 102785

Fig. 4. 4D D-vine structure with three trees and six edges.

( ( ⃒ ) ( ⃒ )
∂Cx,v− j |v− j F x⃒v− j , F vj ⃒v− j
F(x|v) = ( ) (15)
∂F vj |v− j

Knowing that v represent a d-dimensional vector and vj represents the arbitrarily chosen com- ponent of v, v− j.
When v is univariate and x as well as v are uniformly distributed on [0,1], we obtain:
∂Cv,x (x, v, θ)
F(x|v) = (16)
∂v
Knowing that θ represent the copula parameters.
Simulation procedure.
d dependent uniform [0,1] variables are sampled, in both the canonical and D-vine, as follows:
Step 1: sample wi ; i = 1, …, d independent uniform on [0,1].
Step 2: z1 = w1.
( )
Step 3: z2 = F2− 1 wz12
1
( )
Step 4: z3 = F−3 1 z1w,z2 2
1,2

Step 5:… = …
( )
1 w2
Step 6:zd = F− d z1 ,…,zd− 1
1,2,…,d− 1
( )
The C-vine and D-vine procedures diverge in the computation of F xj |x1 , x2 …xj− 1 .
( )
The computation of F xj |x1 , x2 …xj− 1 is as follow for the C-vine:
( ( ) ( ))
∂Cj,j− 1|1,…,j− 2 F xj |x1 , …xj− 2 , F xj− 1 |x1 , …, xj− 2
( ) (17)
∂F xj− 1 |x1 , …, xj− 2
( )
The computation of F xj |x1 , x2 …xj− 1 is as follow for the D-vine:
( ( ) ( ))
∂Cj,1|2,…,j− 1 F xj |x2 , …xj− 1 , F x1 |x2 , …, xj− 1
( ) (18)
∂F x1 |x2 , …, xj− 1

Appendix B
Table 8
C-Vine Copula tree for Portfolio A.

tree edge family cop par par2 tau utd ltd

1 6,2 3 C 0.18 0.00 0.08 – 0.02

6,3 3 C 0.15 0.00 0.07 – 0.01
6,1 3 C 0.16 0.00 0.08 – 0.01
6,4 16 SJ 1.09 0.00 0.05 – 0.11
6,5 3 C 0.19 0.00 0.09 – 0.02
2 5,2;6 17 SBB1 0.16 1.70 0.46 0.07 0.50
5,3;6 7 BB1 0.69 1.39 0.47 0.35 0.48
5,1;6 7 BB1 0.69 1.48 0.50 0.40 0.51
5,4;6 20 SBB8 3.23 0.76 0.34 – –
3 4,2;5,6 2 t 0.10 12.03 0.06 0.01 0.01
4,3;5,6 2 t 0.26 11.05 0.17 0.02 0.02
4,1;5,6 4 G 1.13 0.00 0.12 0.16 –
4 1,2;4,5,6 2 t 0.83 9.58 0.63 0.35 0.35
1,3;4,5,6 17 SBB1 0.29 2.32 0.62 0.36 0.65
5 3,2;1,4,5,6 2 t − 0.50 17.32 − 0.34 0.00 0.00

11
M.B. Osman et al. International Review of Financial Analysis 89 (2023) 102785

Note: In the edge column, the numbers 1,2,3,4,5 and 6 represents respectively the S&P500, Nasdaq composite, Dow jones industrial Average, FTSE100, TSX, and
Bitcoin.
Table 9
C-Vine Copula tree for Portfolio B.

tree edge family cop par par2 tau utd ltd

1 6,2 3 C 0.18 0.00 0.08 – 0.02

6,4 16 SJ 1.09 0.00 0.05 – 0.11
6,3 3 C 0.15 0.00 0.07 – 0.01
6,1 3 C 0.16 0.00 0.08 – 0.01
6,7 18 SBB6 1.24 2.15 0.59 – 0.70
6,5 3 C 0.19 0.00 0.09 – 0.02
2 5,2;6 17 SBB1 0.16 1.70 0.46 0.07 0.50
5,4;6 20 SBB8 3.23 0.76 0.34 – –
5,3;6 7 BB1 0.69 1.39 0.47 0.35 0.48
5,1;6 7 BB1 0.69 1.48 0.50 0.40 0.51
5,7;6 1 N 0.10 0.00 0.07 – –
3 7,2;5,6 104 Tawn 3.78 0.00 0.00 0.00 –
7,4;5,6 5 F 0.15 0.00 0.02 – –
7,3;5,6 5 F 0.27 0.00 0.03 – –
7,1;5,6 5 F 0.31 0.00 0.03 – –
4 1,2;7,5,6 2 t 0.83 9.01 0.63 0.36 0.36
1,4;7,5,6 4 G 1.13 0.00 0.12 0.16 –
1,3;7,5,6 17 SBB1 0.32 2.37 0.64 0.40 0.66
5 3,2;1,7,5,6 2 t − 0.53 14.84 − 0.36 0.00 0.00
3,4;1,7,5,6 9 BB7 1.09 0.14 0.11 0.11 0.01
6 4,2;3,1,7,5,6 124 Tawn90 − 10.59 0.00 − 0.00 – –
Note: In the edge column, the numbers 1,2,3,4,5, 6, and 7 represents respectively the S&P500, Nasdaq composite, Dow jones industrial Average, FTSE100, TSX,
Bitcoin, and Ethereum.

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