<abstract xmlns="http://www.w3.org/1999/xhtml"><bold>Background:</bold> 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.<bold>Objectives:</bold> 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.<bold>Methods/Approach:</bold> 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.<bold>Results:</bold> Bitcoin and Ripple proved as a possible diversification instrument on most of the observed European markets since corresponding coefficients of unconditional correlation are negative.<bold>Conclusions:</bold> 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.</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.

Achieving Portfolio Diversification through Cryptocurrencies in European Markets

Business Systems Research Journal

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

{"article-title":"Achieving Portfolio Diversification through Cryptocurrencies in European Markets"}

Background: Cryptocurrencies represent a specific technological innovation in financial markets that keeps getting more and more popular among investors around...

Achieving Portfolio Diversification through Cryptocurrencies in European Markets

Data publikacji: 16 wrz 2019

Zakres stron: 85 - 107

Otrzymano: 02 paź 2018

Przyjęty: 03 lut 2019

DOI: https://doi.org/10.2478/bsrj-2019-020

Słowa kluczowe
Bitcoin, portfolio diversification, volatility clustering, wavelet, cryptocurrencies

© 2019 Ana Pavković et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Achieving Portfolio Diversification through Cryptocurrencies in European Markets

Data publikacji: 16 wrz 2019

Zakres stron: 85 - 107

Otrzymano: 02 paź 2018

Przyjęty: 03 lut 2019

DOI: https://doi.org/10.2478/bsrj-2019-020

Słowa kluczoweBitcoin, portfolio diversification, volatility clustering, wavelet, cryptocurrencies

© 2019 Ana Pavković et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Słowa kluczowe
Bitcoin, portfolio diversification, volatility clustering, wavelet, cryptocurrencies