Does Volatility Connectedness Across Major Cryptocurrencies Behave the Same at Different Frequencies? A portfolio Risk Analysis

Cryptocurrencies attract a special attention of academicians, investors, institutional investors and media since its creation in 2008. The aim of this research proposal is to investigate dynamic frequency connectedness for volatility differences among eight popular cryptocurrencies (Bitcoin (BTC), Ethereum, Litecoin, Dash, Monero, Ripple, Nem and Stellar). We will employ the methodologies of Diebold and Yilmaz (2014; 2016) and Barunik and Krehlik (2018). This study will consider three-time investment horizons (the short-term ranges between 1-5 days, the medium-term, 5-22 days, and the long-term, above 22 days). The decomposition of a system into short- and long-term is significant for co-integration (Engle and Granger, 1987). Barun?k and K?ehl?k (2018) document that a shock with a strong long-term effect will have a high power at low frequencies and, in case it transmits to other variables, points to long-term connectedness. Balke and Wohar (2002) show that long-term volatility spillovers are due to permanent changes in investor expectations about future dividends. More importantly, we will analyze the potential portfolio diversification and downside risk reduction benefits in the cryptocurrency markets. More precisely, we will examine the risk evaluation of a portfolio composed of BTC and each of the other cryptocurrencies using different portfolios and risk measures. A benchmark portfolio composed of BTC and three other portfolios (an optimally weighted, equally weighted, and a hedged portfolio) composed of BTC and one other cryptocurrencies will be considered. To the best of our knowledge, this is the first study that addresses the directional spillovers, connectedness and diversification benefits in cryptocurrency markets under time-frequency space. Thus, our proposed research is expected to provide new insights that will be helpful to investors, portfolio managers and policy makers who are interested in exploiting the cryptocurrency markets.

Cryptocurrencies attract a special attention of academicians, investors, institutional investors and media since its creation in 2008. The aim of this research proposal is to investigate dynamic frequency connectedness for volatility differences among eight popular cryptocurrencies (Bitcoin (BTC), Ethereum, Litecoin, Dash, Monero, Ripple, Nem and Stellar). We will employ the methodologies of Diebold and Yilmaz (2014; 2016) and Barunik and Krehlik (2018). This study will consider three-time investment horizons (the short-term ranges between 1-5 days, the medium-term, 5-22 days, and the long-term, above 22 days). The decomposition of a system into short- and long-term is significant for co-integration (Engle and Granger, 1987). Barun?k and K?ehl?k (2018) document that a shock with a strong long-term effect will have a high power at low frequencies and, in case it transmits to other variables, points to long-term connectedness. Balke and Wohar (2002) show that long-term volatility spillovers are due to permanent changes in investor expectations about future dividends. More importantly, we will analyze the potential portfolio diversification and downside risk reduction benefits in the cryptocurrency markets. More precisely, we will examine the risk evaluation of a portfolio composed of BTC and each of the other cryptocurrencies using different portfolios and risk measures. A benchmark portfolio composed of BTC and three other portfolios (an optimally weighted, equally weighted, and a hedged portfolio) composed of BTC and one other cryptocurrencies will be considered. To the best of our knowledge, this is the first study that addresses the directional spillovers, connectedness and diversification benefits in cryptocurrency markets under time-frequency space. Thus, our proposed research is expected to provide new insights that will be helpful to investors, portfolio managers and policy makers who are interested in exploiting the cryptocurrency markets.