Cryptocurrencies and Portfolio Performance. Does Cryptocurrency Help Improve the Portfolio Performance?

Abstract

This paper investigates the performance of cryptocurrencies and market indices. Using the dynamic conditional correlation (DCC) model, the result shows that cryptocurrencies and market indices, contrary to much of the literature, tend to move in the same direction, resulting in little or no benefits in portfolio management. Dividing into the sub-sample period, cryptocurrencies have moved even more strongly with market indices during the recent period after the COVID-19 pandemic, indicating the possibility of no hedging benefit. This paper shows that inclusion of cryptocurrency in a portfolio increases the return as well as volatility, as the risk-adjusted return does not show any sign of improvement. A portfolio comprising the FTSE 100 Index seems to receive the greatest benefit of including cryptocurrencies as the risk-adjusted performance improves.