Cryptocurrency Portfolio Diversification Using Network Community Detection
Date Issued
2022-11-15
Author(s)
Kitanovski, Dimitar
Chorbev, Ivan
Abstract
As of the end of 2013 till now we are witnessing huge
volatility and risk in the cryptocurrency market compared to
flat currency or stock market. Thus, in this market the portfolio
diversification is of big importance in order to reduce volatility
and keep the optimal return for the investors. A usual approach
for portfolio construction is to keep a balance between returns
and volatility, based on their interdependence and individual
returns. One way of diversification is employing clustering or
community detection algorithms to select a more diverse set
of assets. We study the utilization of the Louvain algorithm
and affinity propagation for community detection, based on
correlation and mutual information between cryptocurrencies,
for potential application in portfolio diversification.
volatility and risk in the cryptocurrency market compared to
flat currency or stock market. Thus, in this market the portfolio
diversification is of big importance in order to reduce volatility
and keep the optimal return for the investors. A usual approach
for portfolio construction is to keep a balance between returns
and volatility, based on their interdependence and individual
returns. One way of diversification is employing clustering or
community detection algorithms to select a more diverse set
of assets. We study the utilization of the Louvain algorithm
and affinity propagation for community detection, based on
correlation and mutual information between cryptocurrencies,
for potential application in portfolio diversification.
Subjects
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