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Copula-Based Trading of Cointegrated Cryptocurrency Pairs

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  • Masood Tadi
  • Jiv{r}'i Witzany

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.

Suggested Citation

  • Masood Tadi & Jiv{r}'i Witzany, 2023. "Copula-Based Trading of Cointegrated Cryptocurrency Pairs," Papers 2305.06961, arXiv.org, revised Jun 2023.
    • Handle: RePEc:arx:papers:2305.06961
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    File URL: http://arxiv.org/pdf/2305.06961
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