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Constructing cointegrated cryptocurrency portfolios for statistical arbitrage

Tim Leung (Department of Applied Mathematics, University of Washington, Seattle, Washington, USA)
Hung Nguyen (Department of Applied Mathematics, University of Washington, Seattle, Washington, USA)

Studies in Economics and Finance

ISSN: 1086-7376

Article publication date: 25 September 2019

Issue publication date: 17 October 2019

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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

Citation

Leung, T. and Nguyen, H. (2019), "Constructing cointegrated cryptocurrency portfolios for statistical arbitrage", Studies in Economics and Finance, Vol. 36 No. 3, pp. 581-599. https://doi.org/10.1108/SEF-08-2018-0264

Publisher

:

Emerald Publishing Limited

Copyright © 2019, Emerald Publishing Limited

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