Abstract
This study explores the dynamic interrelations between cryptocurrencies and the global equity markets. It does this by distinguishing between volatile cryptocurrencies (Bitcoin and Ethereum) and stablecoins (USDT and DGX). The primary objective is to determine whether the asset combinations serve as safe havens, diversifiers, or hedges at different time frequencies.
This study makes use of daily asset prices collected from Yahoo Finance from January 2018 to December 2024. The variables that the study uses are the BTC, ETH, USDT, DGX, MSCI World, and MSCI EM indices. This study employs the wavelet coherence to analyse the time-varying co-movement between cryptocurrencies and the MSCI World and MSCI EM indices. It then applies the maximal overlap discrete wavelet transform (MODWT) to decompose the asset return series into high and low frequency periods. The decomposition assists in conducting portfolios for short- and long-term investors. Thereby, the study completes a minimum Conditional Value at Risk (CVaR) portfolio optimisation with quarterly rebalancing.
The results show that BTC, ETH, and DGX primarily act as diversifiers while USDT shows safe-haven and hedging potential, especially in low-frequency periods. The DGX results showed that DGX acted less like a stablecoin because of the high correlation with stock indices in the crisis period. The portfolio optimisation outcomes demonstrated that the short-term portfolios allocate heavily towards Tether (USDT) to mitigate downside risk, while the long-term portfolio included a broader combination of digital and equity assets.
Overall, the findings highlight the significance of investment horizon in determining the suitability of digital assets for risk management and suggest that stable cryptocurrencies play a crucial role in portfolio stabilisation.