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Should stock investors include cryptocurrencies in their portfolios after all? Evidence from a conditional diversification benefits measure

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  • Sercan Demiralay
  • Selçuk Bayracı

Abstract

Higher media coverage and stronger investor interest in cryptocurrency market may create closer linkages with traditional assets, leading to deteriorated diversification benefits. Cryptocurrencies have recently emerged as an alternative digital asset class; however, very little is known about their portfolio performances. In this study, we investigate the time‐varying investment benefits of cryptocurrencies for stock portfolios using a correlation‐based conditional diversification benefits (CDB) measure. We construct six portfolios consisting of cryptocurrencies, developed and emerging equity markets and find that the time‐varying correlations between cryptocurrencies and stock markets are generally low. However, the level of correlations significantly increases in turbulent periods, such as Brexit referendum and Coincheck hack. The dynamic CDB measures suggest that adding cryptocurrencies to equity market portfolios enhances portfolio diversification; however, the benefits of diversification have diminished after late 2017. Our results offer significant insights and potential implications for market participants.

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  • Sercan Demiralay & Selçuk Bayracı, 2021. "Should stock investors include cryptocurrencies in their portfolios after all? Evidence from a conditional diversification benefits measure," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 6188-6204, October.
    • Handle: RePEc:wly:ijfiec:v:26:y:2021:i:4:p:6188-6204
    DOI: 10.1002/ijfe.2116
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    2. Lehlohonolo Letho & Grieve Chelwa & Abdul Latif Alhassan, 2022. "Cryptocurrencies and portfolio diversification in an emerging market," China Finance Review International, Emerald Group Publishing Limited, vol. 12(1), pages 20-50, January.
    3. José Almeida & Tiago Cruz Gonçalves, 2022. "Portfolio Diversification, Hedge and Safe-Haven Properties in Cryptocurrency Investments and Financial Economics: A Systematic Literature Review," JRFM, MDPI, vol. 16(1), pages 1-25, December.
    4. Zhao, Xin & Ghaemi Asl, Mahdi & Rashidi, Muhammad Mahdi & Vasa, László & Shahzad, Umer, 2023. "Interoperability of the revolutionary blockchain architectures and Islamic and conventional technology markets: Case of Metaverse, HPB, and Bloknet," The Quarterly Review of Economics and Finance, Elsevier, vol. 92(C), pages 112-131.
    5. Karim, Sitara & Lucey, Brian M. & Naeem, Muhammad Abubakr & Vigne, Samuel A., 2023. "The dark side of Bitcoin: Do Emerging Asian Islamic markets help subdue the ethical risk?," Emerging Markets Review, Elsevier, vol. 54(C).
    6. Zhou, Fan, 2024. "Cryptocurrency: A new player or a new crisis in financial markets? —— Evolutionary analysis of association and risk spillover based on network science," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 648(C).
    7. Anwer, Zaheer & Farid, Saqib & Khan, Ashraf & Benlagha, Noureddine, 2023. "Cryptocurrencies versus environmentally sustainable assets: Does a perfect hedge exist?," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 418-431.
    8. Conlon, Thomas & Corbet, Shaen & Hou, Yang (Greg), 2024. "Contagion effects of permissionless, worthless cryptocurrency tokens: Evidence from the collapse of FTX," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 91(C).

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