Original scientific paper
https://doi.org/10.2478/bsrj-2019-020
Achieving Portfolio Diversification through Cryptocurrencies in European Markets
Ana Pavković
orcid.org/0000-0003-0567-7558
; University of Zagreb, Faculty of Economics and Business, Zagreb, Croatia
Mihovil Anđelinović
orcid.org/0000-0003-2061-0693
; University of Zagreb, Faculty of Economics and Business, Zagreb, Croatia
Ivan Pavković
orcid.org/0000-0003-1703-3039
; 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.
Keywords
Bitcoin; portfolio diversification; volatility clustering; wavelet; cryptocurrencies
Hrčak ID:
224562
URI
Publication date:
1.9.2019.
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