Constructing the global market portfolio and adding in cryptocurrencies

What is the market?

Depending on who you ask, you may get slightly different answers because, well, one takes that data series, the other one takes the other data series. So then, I said with my colleagues, “Let’s do it right for once. We'll spend a month of time on it and then we’re done.” And how it usually goes with projects that you think will last only a month? They can last up to a couple of years, and that’s also how this went. We focused on the global investment market portfolio, as we call it, which to us means that we put all financial investors together and saw what kind of investments they held that they could trade with each other. So, that means if an investor holds a private home, that’s not part of our invested market portfolio because that’s not something that another investor would easily be able to buy. Only those investment opportunities that we really think financial investors will trade with each other’.

Current value

In ten years’ time, the market has grown a lot: ‘now it’s at about $177 trillion. A large component is global equities, listed public equities. That’s the big part of that pie. The other very large parts are the government bonds and investment-grade corporate bonds. I think around 40% or so is equities, maybe 45%, listed equities. And I think the government portfolios are probably 35 in total’. It was a lot of work to collect all this data, and Swinkels didn’t have a lot of students do the heavy lifting: ‘in some senses, people talk these days about data science, so I like to call myself a data scientist in the sense that I’m actually digging up a lot of the data myself and evaluating it myself. So, maybe it's not the same as data scientists who use AI and machine learning, but I got this data all by myself. And the main problem was not so much finding out what the current market portfolio looks like, because the data for market caps of asset classes today is a bit limited'.

When are you going to start to incorporate cryptocurrencies into the global market portfolio and how are you going to think about that in the coming years?

Swinkels: ‘in one of our draft papers, we actually included cryptocurrencies. But as you know, as academics, we sometimes have to listen to what reviewers say, and they thought it was distracting to put it in. So, then we took it out, but now we have so many people that, by hand, force it in. So, I’ve seen many of the graphs of the market portfolio where somebody added a slice of cryptocurrencies, and we’re now working on a new paper where the end product should be monthly returns because the previous one that we did on returns presented annual returns, which is nice if you want to look at the long-run average. But if you want to do something really complicated, like risk analysis or calculate a beta, then it’s better to have a monthly return. The volatility of a crypto currency is much higher, so it would count for some of the volatility of the market portfolio, even though the weight is only 1%’.