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

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.