Constructing cointegrated cryptocurrency portfolios for statistical arbitrage

Tim Leung and Hung Nguyen

Studies in Economics and Finance, 2019, vol. 36, issue 4, 581-599

Abstract: Purpose - This paper aims to present a methodology for constructing cointegrated portfolios consisting of different cryptocurrencies and examines the performance of a number of trading strategies for the cryptocurrency portfolios. Design/methodology/approach - The authors apply a series of statistical methods, including the Johansen test and Engle–Granger test, to derive a linear combination of cryptocurrencies that form a mean-reverting portfolio. Trading systems are designed and different trading strategies with stop-loss constraints are tested and compared according to a set of performance metrics. Findings - The paper finds cointegrated portfolios involving four cryptocurrencies: Bitcoin (BTC), Ethereum (ETH), Bitcoin Cash (BCH) and Litecoin (LTC), and the corresponding trading strategies are shown to be profitable under different configurations. Originality/value - The main contributions of the study are the use of multiple altcoins in addition to bitcoin to construct a cointegrated portfolio, and the detailed comparison of the performance of different trading strategies with and without stop-loss constraints.

Keywords: Cryptocurrency; Cointegration; Ethereum; Litecoin; Statistical arbitrage; Bitcoin cash (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:sefpps:sef-08-2018-0264

DOI: 10.1108/SEF-08-2018-0264

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