Strategic Diversification for Asynchronous Asset Trading: Insights from Generalized Coherence Analysis of Cryptocurrency Price Movements

  • Nirvik Sinha Northwestern University
  • Yuan Yang University of Oklahoma
Keywords: Price movement, Cryptocurrency, n:m coherence, Hierarchical custering, Portfolio diversification

Abstract

Non-linear interactions between cryptocurrency price movements can elicit cross-frequency coupling (CFC) wherein one set of frequencies in the 1st timeseries is coupled to another set of frequencies in the 2nd timeseries. To investigate this, we use a generalized coherence approach to detect and quantify both linear (i.e., iso-frequency coupling, IFC) and non-linear coherence (CFC) and the associated phase relationships between the intra-day price changes of various pairs of cryptocurrencies for the year 2020. Using this information, we further assess the risk reduction associated with diversification of portfolios between each pair of a small market capital and a large market capital cryptocurrency, for both synchronous and asynchronous trading conditions. While mean pairwise IFC values were lower for smaller cryptocurrencies, pairwise CFC values were more heterogeneous and had no correlation with the market capital size. Diversification of portfolios resulted in reduced risk for synchronously-traded pairs of those cryptocurrencies which had low IFC. For asynchronous trading conditions, if the larger market capital cryptocurrency was traded at a higher frequency, diversification almost always reduced risk. Thus, the novel approach used in this study reveals important insights into the complex dynamics that govern the price trends of cryptocurrencies.

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Published
2021-09-23
How to Cite
Sinha, N., & Yang, Y. (2021). Strategic Diversification for Asynchronous Asset Trading: Insights from Generalized Coherence Analysis of Cryptocurrency Price Movements. Ledger, 6. https://doi.org/10.5195/ledger.2021.227
Section
Research Articles