Copula-Based Trading of Cointegrated Cryptocurrency Pairs

Masood Tadi and Ji\v{r}\'i Witzany

Papers from arXiv.org

Abstract: This research introduces a novel pairs trading strategy based on copulas for cointegrated pairs of cryptocurrencies. To identify the most suitable pairs, the study employs linear and non-linear cointegration tests along with a correlation coefficient measure and fits different copula families to generate trading signals formulated from a reference asset for analyzing the mispricing index. The strategy's performance is then evaluated by conducting back-testing for various triggers of opening positions, assessing its returns and risks. The findings indicate that the proposed method outperforms buy-and-hold trading strategies in terms of both profitability and risk-adjusted returns.

Date: 2023-05, Revised 2023-06
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