The Relevance of Intraday Data on Assessing the Diversification Benefits of Cryptocurrencies for Forex Investors : A Portfolio Performance Analysis

This study identifies and assesses the diversification benefits of including large-cap and highly liquid cryptocurrencies into portfolios comprised of major fiat currencies quoted against the USD. We employ hourly data over the period from January 01, 2019 to May 31, 2021. We identify hedging properties across crypto-currency pairs both before and during the pandemic based on intraday volatility fitting through multiplicative component Generalized Autoregressive Conditional Heteroscedasticity (mcGARCH) models and the estimation of Dynamic Conditional Correlation (DCC) Skew Student Copulas. Then, we calculate the dynamic portfolio rebalancing weights that maximize the SR (VaR) of our combined crypto-Forex strategy. We find that the optimal diversified crypto-Forex portfolio outperforms the actively and passively managed Forex portfolios based on both total risk and downside and upside risk performance measures. Outperformance is robust to different market conditions