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Hedging cryptos with Bitcoin futures

Author

Listed:
  • Francis Liu
  • Natalie Packham
  • Meng-Jou Lu
  • Wolfgang Karl Härdle

Abstract

The introduction of derivatives on Bitcoin enables investors to hedge risk exposures in cryptocurrencies. Because of volatility swings and jumps in cryptocurrency prices, the traditional variance-based approach to obtain hedge ratios may not be suitable for hedgers. In this work, we consider two extensions of the traditional approach: first, different dependence structures are modelled by different copulae, such as the Gaussian, Student-t, Normal Inverse Gaussian and Archimedean copulae; second, different risk measures, such as value-at-risk, expected shortfall and spectral risk measures are employed to find the optimal hedge ratio. Extensive out-of-sample tests using the data from the time period December 2017 until May 2021 give insights in the practice of hedging various cryptos and crypto indices, including Bitcoin, Ethereum, Cardano, the CRIX index and a number of crypto-portfolios. Evidence shows that BTC futures can effectively hedge BTC and BTC-involved indices. This promising result is consistent across different risk measures and copulae except for the Frank copula. On the other hand, we observe complex and diverse dependence structures between non-BTC-related cryptocurrencies and the BTC futures. As a consequence, the hedge performance of non-BTC-related cryptocurrencies is mixed and even suitable for some assets.

Suggested Citation

  • Francis Liu & Natalie Packham & Meng-Jou Lu & Wolfgang Karl Härdle, 2023. "Hedging cryptos with Bitcoin futures," Quantitative Finance, Taylor & Francis Journals, vol. 23(5), pages 819-841, May.
    • Handle: RePEc:taf:quantf:v:23:y:2023:i:5:p:819-841
    DOI: 10.1080/14697688.2023.2187316
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    Cited by:

    1. Jan Sila & Michael Mark & Ladislav Kristoufek & Thomas A. Weber, 2025. "Crypto market betas: the limits of predictability and hedging," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 11(1), pages 1-28, December.
    2. Kristjanpoller, Werner & Nekhili, Ramzi & Bouri, Elie, 2024. "Ethereum futures and the efficiency of cryptocurrency spot markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 654(C).
    3. Zuo Xiaorui & Chen Yao-Tsung & Härdle Wolfgang Karl, 2024. "Emoji driven crypto assets market reactions," Management & Marketing, Sciendo, vol. 19(2), pages 158-178.

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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