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Time frequency analysis of the commonalities between Bitcoin and major Cryptocurrencies: Portfolio risk management implications

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  • Mensi, Walid
  • Rehman, Mobeen Ur
  • Al-Yahyaee, Khamis Hamed
  • Al-Jarrah, Idries Mohammad Wanas
  • Kang, Sang Hoon

Abstract

This paper uses wavelet coherence and cross wavelet transform approaches to examine co-movement between Bitcoin and five major cryptocurrencies (Dash, Ethereum, Litecoin, Monero and Ripple) and their portfolio risk implications. The results show evidence of co-movements in time frequency space with leading relationships of Bitcoin with Dash, Monero and Ripple, lagging relationship with Ethereum, and out of phase movements with Litecoin. By considering different portfolios (risk-minimizing portfolio, equally weighted portfolio and hedging portfolio), we show evidence that a mixed portfolio (Bitcoin with other cryptocurrencies) provides better diversification benefits for investors and portfolio managers. Finally, an Ethereum-Bitcoin (Monero-Bitcoin) hedging portfolio offers the highest risk reductions and hedging effectiveness under medium and long term (short term) horizon. The results of downside risk reductions are time horizon dependent.

Suggested Citation

  • Mensi, Walid & Rehman, Mobeen Ur & Al-Yahyaee, Khamis Hamed & Al-Jarrah, Idries Mohammad Wanas & Kang, Sang Hoon, 2019. "Time frequency analysis of the commonalities between Bitcoin and major Cryptocurrencies: Portfolio risk management implications," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 283-294.
    • Handle: RePEc:eee:ecofin:v:48:y:2019:i:c:p:283-294
    DOI: 10.1016/j.najef.2019.02.013
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    More about this item

    Keywords

    Cryptocurrencies; Time frequency analysis; Hedging effectiveness; Downside risk; Wavelet techniques;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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