Risk Structure and Optimal Hedging of Bitcoin Inverse Futures

34 Pages Posted: 25 Sep 2019

See all articles by Jun Deng

Jun Deng

University of International Business and Economics (UIBE) - School of Banking and Finance

Huifeng Pan

University of International Business and Economics (UIBE)

Shuyu Zhang

Zhongnan University of Economics and Law; Zhongnan University of Economics and Law

Bin Zou

University of Connecticut - Department of Mathematics

Date Written: September 8, 2019

Abstract

In the Bitcoin futures markets, the dominating contracts are inverse contracts. Unlike standard futures, Bitcoin inverse futures have a non-linear payoff structure, are settled in Bitcoin instead of the fiat currency, and require Bitcoins to be deposited into the margin account during trading.

We characterize the unique high-order risk factors, asymmetry effect and (de)leverage effect of Bitcoin inverse futures, and obtain optimal hedging strategies in closed forms for both short and long hedges under the minimum-variance framework. We use the market data of Bitcoin spot and futures to conduct empirical studies. Our findings show that the optimal hedging strategies of Bitcoin inverse futures achieve superior hedging performance across exchanges.

Keywords: Bitcoin, Inverse futures, Minimum-variance hedging, High-order risk

JEL Classification: G110, G320

Suggested Citation

Deng, Jun and Pan, Huifeng and Zhang, Shuyu and Zou, Bin, Risk Structure and Optimal Hedging of Bitcoin Inverse Futures (September 8, 2019). Available at SSRN: https://ssrn.com/abstract=3450018 or http://dx.doi.org/10.2139/ssrn.3450018

Jun Deng

University of International Business and Economics (UIBE) - School of Banking and Finance ( email )

No.10, Huixindong Street
Chaoyang District
Beijing, 100029
China

Huifeng Pan

University of International Business and Economics (UIBE)

10, Huixin Dongjie
Changyang District
Beijing, Beijing 100029
China

Shuyu Zhang

Zhongnan University of Economics and Law ( email )

No.143, Wuluo Road
Wuhan, Hubei 430073
China

Zhongnan University of Economics and Law ( email )

182 Nanhu Avenue
East Lake High-tech Development
Wuhan, HUBEI 100029
China

Bin Zou (Contact Author)

University of Connecticut - Department of Mathematics ( email )

341 Mansfield Road U1009
Department of Mathematics
Storrs, CT 06269-1069
United States

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