Arbitrage opportunities in no-arbitrage portfolios: The case of Bitcoin and Treasury Bills

Abstract

Employing both mean-variance portfolio optimization and stochastic dominance analysis, we examine whether including Bitcoin and 3-month US Treasury Bills could generate arbitrage opportunities and lead to better investment choices. The results show, independent of whether short sales are allowed, that: (1) investors are generally indifferent to portfolios with Bitcoin and without Bitcoin; (2) investors prefer to invest in portfolios with Treasury Bills to gain higher expected utility; and (3) portfolios with both Bitcoin and Treasury Bills dominate those without Bitcoin and Treasury Bills, at the first, second, and third order. A sub-period analysis confirms these results, indicating that investors can earn abnormal returns when both Bitcoin and Treasury Bills are included in the same portfolio. Our main findings remain robust to using varying portfolio sizes and excluding outliers. Based on our findings, investors and portfolio managers can optimize their investment processes and exploit arbitrage opportunities when Bitcoin and 3-month US Treasury Bills are included in the same portfolio.