The Role of Cryptocurrencies in Investor Portfolios

29 Pages Posted: 18 Mar 2021

See all articles by Megan Czasonis

Megan Czasonis

State Street Corporate

Mark Kritzman

Windham Capital Management

Baykan Pamir

State Street Associates

David Turkington

State Street Associates

Date Written: March 15, 2021

Abstract

The role of cryptocurrencies as a vehicle for speculation has been well established. However, it is less clear if cryptocurrencies can also serve to manage risk. The authors seek to determine the diversification potential of cryptocurrencies both for short and long horizons. For short horizons, they estimate correlations that consider the direction and magnitude of returns for relevant asset classes, rather than focus on full-sample correlations, as is customary. For long horizons, they compute “single period correlations,” which capture the extent to which cryptocurrencies move synchronously or drift apart from other assets over an investor’s horizon. They also identify utility-maximizing allocations to cryptocurrencies directly from historical return samples that account for all features of the data as well as more nuanced preferences than typically assumed.

Keywords: Autocorrelation, Conditional correlation, Cross-correlation, Cryptocurrency, Full-scale optimization, Kinked utility function, Lottery preference, Pearson correlation, Single period correlation Z-score

Suggested Citation

Czasonis, Megan and Kritzman, Mark and Pamir, Baykan and Turkington, David, The Role of Cryptocurrencies in Investor Portfolios (March 15, 2021). MIT Sloan Research Paper No. 6418-21, Available at SSRN: https://ssrn.com/abstract=3806212 or http://dx.doi.org/10.2139/ssrn.3806212

Megan Czasonis (Contact Author)

State Street Corporate ( email )

1 Lincoln Street
Boston, MA 02111
United States

Mark Kritzman

Windham Capital Management ( email )

800 Boylston Street
30th Floor
Boston, MA 02199
United States
6174193900 (Phone)
6172365034 (Fax)

Baykan Pamir

State Street Associates ( email )

140 Mt. Auburn St.
Cambridge, MA 02138
United States

David Turkington

State Street Associates ( email )

United States

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