On Cointegration and Cryptocurrency Dynamics

25 Pages Posted: 21 Jul 2020 Last revised: 20 Jan 2021

See all articles by Georg Keilbar

Georg Keilbar

Humboldt-Universität zu Berlin

Yanfen Zhang

Xiamen University

Date Written: June 26, 2020

Abstract

This paper aims to model the joint dynamics of cryptocurrencies in a nonstationary setting. In particular, we analyze the role of cointegration relationships within a large system of cryptocurrencies in a vector error correction model (VECM) framework. To enable analysis in a dynamic setting, we propose the COINtensity VECM, a nonlinear VECM specification accounting for a varying systemwide cointegration exposure. Our results show that cryptocurrencies are indeed cointegrated with a cointegration rank of four. We also find that all currencies are affected by these long term equilibrium relations. The nonlinearity in the error adjustment turned out to be stronger during the height of the cryptocurrency bubble. A simple statistical arbitrage trading strategy is proposed showing a great in-sample performance, whereas an out-of-sample analysis gives reason to treat the strategy with caution.

Keywords: Cointegration, VECM, Nonstationarity, Cryptocurrencies

Suggested Citation

Keilbar, Georg and Zhang, Yanfen, On Cointegration and Cryptocurrency Dynamics (June 26, 2020). Available at SSRN: https://ssrn.com/abstract=3636278 or http://dx.doi.org/10.2139/ssrn.3636278

Georg Keilbar (Contact Author)

Humboldt-Universität zu Berlin ( email )

Humboldt Universität
Unter den Linden 6
Berlin, 10099
Germany

Yanfen Zhang

Xiamen University ( email )

Xiamen, Fujian 361005
China

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