Cryptocurrencies from the perspective of euro investors: a re-examination of diversification benefits and a new day-of-the-week effect

Abstract

We examine diversification benefits of several cryptocurrencies between 11 August 2015 and 7 August 2018 using mean–variance spanning tests. Among the eight cryptocurrencies under study, we find that all single cryptocurrencies besides one as well as a combination thereof yield significant diversification benefits when being added to a well-diversified benchmark portfolio. However, the improvement solely stems from an increase in portfolio returns, not a reduction of risk. Along with that distinction, we find that the overall beneficial impact of cryptocurrencies only holds for bullish market phases throughout our observation period, but vanishes completely throughout the price collapse of cryptocurrencies in 2018. Furthermore, we model daily differences in the returns and volatility of cryptocurrencies with an EGARCH model. Throughout the observation period considered, returns of all eight cryptocurrencies on Sundays are significantly lower than those on other days. A similar but less distinctive pattern is also observable for their conditional variance. One possible reason for the negative Sunday effect is the lower trading volume observed on Sundays, in connection with the assumption of a causal relationship between trading volume and asset returns and volatility as suggested by the mixture of distributions hypothesis.