The End of Mean-Variance? Tsallis Entropy Revolutionises Portfolio Optimisation in Cryptocurrencies

Has the mean-variance framework become obsolete? In this paper, we replace traditional variance–covariance methods of portfolio optimisation with relative Tsallis entropy and mutual information measures. Its goal is to enhance risk management and diversification in complicated finance ecosystems. We utilize the S&P 500 and Bitwise 10 cryptocurrency indices’ daily returns (2019–2024 data) and conduct our analysis to the year 2020 under extreme shocks. Many models were trained with different configurations, like mean-variance (MV), mean-entropy (ME), and mean-mutual information (MI) traders and their corresponding variants, using Sharpe’s ratio, Jensen’s alpha, and entropy value of risk (EVAR). The findings indicate that entropic models outperform conventional models in terms of diversification and, especially, extreme risk management. Because the appropriate normalization conditions often fail to be satisfied, we can informally see that after a recalibration of the effective frontier, we obtain from EVAR an accumulated resilience aspect to these rare events while also observing the great potential of entropy-based models to replicate non-linear dependencies between assets. The results show that models combining entropy and mutual information optimise the gain–loss ratio (GLR), providing stable diversification and improved risk management, while maximising returns in complex and volatile market environments.

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Publication Details

Journal
Journal of risk and financial management
Published
2025-02-03
DOI
https://doi.org/10.3390/jrfm18020077
Citations
4
Primary Topic
Complex Systems and Time Series Analysis
Type
article
Field-Weighted Citation Impact
12.52
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article

The End of Mean-Variance? Tsallis Entropy Revolutionises Portfolio Optimisation in Cryptocurrencies

Kamel Naoui, Sana Gaied Chortane
4 citations
Journal of risk and financial management
Complex Systems and Time Series Analysis
12.52
article

The End of Mean-Variance? Tsallis Entropy Revolutionises Portfolio Optimisation in Cryptocurrencies

Kamel Naoui, Sana Gaied Chortane
article en
4 citations

Abstract

Has the mean-variance framework become obsolete? In this paper, we replace traditional variance–covariance methods of portfolio optimisation with relative Tsallis entropy and mutual information measures. Its goal is to enhance risk management and diversification in complicated finance ecosystems. We utilize the S&P 500 and Bitwise 10 cryptocurrency indices’ daily returns (2019–2024 data) and conduct our analysis to the year 2020 under extreme shocks. Many models were trained with different configurations, like mean-variance (MV), mean-entropy (ME), and mean-mutual information (MI) traders and their corresponding variants, using Sharpe’s ratio, Jensen’s alpha, and entropy value of risk (EVAR). The findings indicate that entropic models outperform conventional models in terms of diversification and, especially, extreme risk management. Because the appropriate normalization conditions often fail to be satisfied, we can informally see that after a recalibration of the effective frontier, we obtain from EVAR an accumulated resilience aspect to these rare events while also observing the great potential of entropy-based models to replicate non-linear dependencies between assets. The results show that models combining entropy and mutual information optimise the gain–loss ratio (GLR), providing stable diversification and improved risk management, while maximising returns in complex and volatile market environments.

Journal of risk and financial managementVol. 18(2)
Manouba University (TN), University of Sousse (TN)
Openalex Percentile: Top 2%
Complex Systems and Time Series Analysis
12.52
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