Common dynamic factors for cryptocurrencies and multiple pair-trading statistical arbitrages

Gianna Figà-Talamanca, Sergio Focardi () and Marco Patacca
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Sergio Focardi: Léonard de Vinci Pôle Universitaire, Research Center

Decisions in Economics and Finance, 2021, vol. 44, issue 2, No 17, 863-882

Abstract: Abstract In this paper, we apply dynamic factor analysis to model the joint behaviour of Bitcoin, Ethereum, Litecoin and Monero, as a representative basket of the cryptocurrencies asset class. The empirical results suggest that the basket price is suitably described by a model with two dynamic factors. More precisely, we detect one integrated and one stationary factor until the end of August 2019 and two integrated factors afterwards. Based on this evidence, we define a multiple long-short trading strategy which proves profitable when the second factor is stationary.

Keywords: Cryptocurrencies; Cointegration; Dynamic factor models; Forecasting analysis; Pair-trading (search for similar items in EconPapers)
JEL-codes: C32 C38 C53 C58 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (5)

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DOI: 10.1007/s10203-021-00318-x

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