Copula-based trading of cointegrated cryptocurrency Pairs
Abstract This study introduces a novel pairs trading strategy based on copulas for cointegrated pairs of cryptocurrencies. To identify the most suitable pairs and generate trading signals formulated from a reference asset for analyzing the mispricing index, the study employs linear and nonlinear coi...
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| Main Authors: | , |
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| Format: | Article |
| Language: | English |
| Published: |
SpringerOpen
2025-01-01
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| Series: | Financial Innovation |
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| Online Access: | https://doi.org/10.1186/s40854-024-00702-7 |
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| _version_ | 1832594520262311936 |
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| author | Masood Tadi Jiří Witzany |
| author_facet | Masood Tadi Jiří Witzany |
| author_sort | Masood Tadi |
| collection | DOAJ |
| description | Abstract This study introduces a novel pairs trading strategy based on copulas for cointegrated pairs of cryptocurrencies. To identify the most suitable pairs and generate trading signals formulated from a reference asset for analyzing the mispricing index, the study employs linear and nonlinear cointegration tests, a correlation coefficient measure, and fits different copula families, respectively. 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 previously examined trading strategies of pairs based on cointegration or copulas in terms of profitability and risk-adjusted returns. |
| format | Article |
| id | doaj-art-f0a83baa547c4a9da8743fc5921fe0e3 |
| institution | Kabale University |
| issn | 2199-4730 |
| language | English |
| publishDate | 2025-01-01 |
| publisher | SpringerOpen |
| record_format | Article |
| series | Financial Innovation |
| spelling | doaj-art-f0a83baa547c4a9da8743fc5921fe0e32025-01-19T12:36:04ZengSpringerOpenFinancial Innovation2199-47302025-01-0111113210.1186/s40854-024-00702-7Copula-based trading of cointegrated cryptocurrency PairsMasood Tadi0Jiří Witzany1Department of Probability and Mathematical Statistics Faculty of Mathematics and Physics, Charles University PragueFaculty of Finance and Accounting, Prague University of Economics and Business PragueAbstract This study introduces a novel pairs trading strategy based on copulas for cointegrated pairs of cryptocurrencies. To identify the most suitable pairs and generate trading signals formulated from a reference asset for analyzing the mispricing index, the study employs linear and nonlinear cointegration tests, a correlation coefficient measure, and fits different copula families, respectively. 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 previously examined trading strategies of pairs based on cointegration or copulas in terms of profitability and risk-adjusted returns.https://doi.org/10.1186/s40854-024-00702-7Statistical arbitragePairs tradingCointegrationCopulasCryptocurrency market |
| spellingShingle | Masood Tadi Jiří Witzany Copula-based trading of cointegrated cryptocurrency Pairs Financial Innovation Statistical arbitrage Pairs trading Cointegration Copulas Cryptocurrency market |
| title | Copula-based trading of cointegrated cryptocurrency Pairs |
| title_full | Copula-based trading of cointegrated cryptocurrency Pairs |
| title_fullStr | Copula-based trading of cointegrated cryptocurrency Pairs |
| title_full_unstemmed | Copula-based trading of cointegrated cryptocurrency Pairs |
| title_short | Copula-based trading of cointegrated cryptocurrency Pairs |
| title_sort | copula based trading of cointegrated cryptocurrency pairs |
| topic | Statistical arbitrage Pairs trading Cointegration Copulas Cryptocurrency market |
| url | https://doi.org/10.1186/s40854-024-00702-7 |
| work_keys_str_mv | AT masoodtadi copulabasedtradingofcointegratedcryptocurrencypairs AT jiriwitzany copulabasedtradingofcointegratedcryptocurrencypairs |