Portfolio Optimization Between Bahrain Stock Market and Bitcoin

Abstract

There is growing academic literature on the benefits of adding new-age digital assets like cryptocurrency to an equity portfolio. This study investigates the volatility spillover between Bahrain All Share (BAX) and Bitcoin to identify the optimum portfolio weights for long-only investors. Bivariate BEKK-GARCH (1,1) is utilized to determine short-run and long-run volatility transmission. The results indicate that equity investors in Bahrain can improve their overall risk-adjusted portfolio returns by adding a tiny proportion of Bitcoin < 1% to the total portfolio. This study adds to the scant literature between cryptocurrencies and Bahrain stock markets. The results can be helpful for investors to increase their risk-adjusted returns by introducing cryptos in their equity-only exposure.