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Achieving Portfolio Diversification through Cryptocurrencies in European Markets

Author

Listed:
  • Pavković Ana

    (University of Zagreb, Faculty of Economics and Business, Zagreb, Croatia)

  • Anđelinović Mihovil

    (University of Zagreb, Faculty of Economics and Business, Zagreb, Croatia)

  • Pavković Ivan

    (University of Zagreb, Faculty of Economics and Business, Zagreb, Croatia)

Abstract

Background: Cryptocurrencies represent a specific technological innovation in financial markets that keeps getting more and more popular among investors around the world. Given the specific characteristics of the cryptocurrencies, this paper examines the possibility of their use as a diversification instrument.Objectives: This paper examines the direction and strength of the relationship between the selected cryptocurrencies and important financial indicators on the European Union market. Since cryptocurrencies are a novelty in the financial system, the empirical literature in this area is rather scarce.Methods/Approach: In order to assess diversification properties of cryptocurrencies for European traders, a comprehensive econometric analysis was carried out. The first part of the analysis refers to the estimation of the multivariate Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model, whereas the second part focuses on wavelet transforms.Results: Bitcoin and Ripple proved as a possible diversification instrument on most of the observed European markets since corresponding coefficients of unconditional correlation are negative.Conclusions: The relationship between the value of the cryptocurrencies and selected indices is generally very weak and slightly negative, indicating that some cryptocurrencies can serve as a means of diversification. However, investors need to take into account the extreme volatility, exhibited in all existing cryptocurrencies.

Suggested Citation

  • Pavković Ana & Anđelinović Mihovil & Pavković Ivan, 2019. "Achieving Portfolio Diversification through Cryptocurrencies in European Markets," Business Systems Research, Sciendo, vol. 10(2), pages 85-107, September.
    • Handle: RePEc:bit:bsrysr:v:10:y:2019:i:2:p:85-107:n:7
    DOI: 10.2478/bsrj-2019-020
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    References listed on IDEAS

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    More about this item

    Keywords

    Bitcoin; portfolio diversification; volatility clustering; wavelet; cryptocurrencies;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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