Constructing Cointegrated Cryptocurrency Portfolios for Statistical Arbitrage

Abstract

In this paper, we analyze the process of constructing cointegrated portfolios of cryptocurrencies. Our procedure involves a series of statistical tests, including the Johansen cointegration test and Engle-Granger two-step approach. Among our results, we construct cointegrated portfolios involving four cryptocurrencies: Bitcoin (BTC), Ethereum (ETH), Bitcoin Cash (BCH), and Litecoin (LTC). We develop a number of trading strategies under different entry/exit thresholds and risk constraints, and examine their performance in details through backtesting and comparison analysis. Our methodology can be applied more generally to create new cointegrated portfolio using other cryptocurrencies.

Keywords: Cryptocurrencies, Cointegration, Mean Reversion, Stationarity, Trading Strategies

JEL Classification: G11, C44, C51, C52