Constructing Cointegrated Cryptocurrency Portfolios for Statistical Arbitrage

Studies in Economics and Finance, Vol. 36 No. 3, pp. 581-599 (2019)

20 Pages Posted: 31 Aug 2018 Last revised: 12 Nov 2019

See all articles by Tim Leung

Tim Leung

University of Washington - Department of Applied Math

Hung Nguyen

Computational Finance and Risk Management

Date Written: August 1, 2018

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

Suggested Citation

Leung, Tim and Nguyen, Hung, Constructing Cointegrated Cryptocurrency Portfolios for Statistical Arbitrage (August 1, 2018). Studies in Economics and Finance, Vol. 36 No. 3, pp. 581-599 (2019), Available at SSRN: https://ssrn.com/abstract=3235890 or http://dx.doi.org/10.2139/ssrn.3235890

Tim Leung (Contact Author)

University of Washington - Department of Applied Math ( email )

Lewis Hall 217
Department of Applied Math
Seattle, WA 98195
United States

HOME PAGE: http://faculty.washington.edu/timleung/

Hung Nguyen

Computational Finance and Risk Management ( email )

Seattle, WA
United States
(509) 869-6158 (Phone)

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