Constructing cointegrated cryptocurrency portfolios for statistical arbitrage. Issue 3 (25th September 2019)

• Record Type: Journal Article
• Authors: Leung, Tim; Nguyen, Hung
• Is Part Of: Studies in economics and finance. Volume 36:Issue 3(2019)
• Page Start: 581
• Page End: 599
• Publication Date: 2019-09-25
• Subjects: Cryptocurrency -- Cointegration -- Ethereum -- Litecoin -- Statistical arbitrage -- Bitcoin cash; Economics -- Periodicals; Finance -- Periodicals; 330
• DOI: 10.1108/SEF-08-2018-0264
• Languages: English
• ISSNs: 1086-7376

Abstract

Abstract : Purpose: This paper aims to present a methodology for constructing cointegrated portfolios consisting of different cryptocurrencies and examines the performance of a number of trading strategies for the cryptocurrency portfolios. Design/methodology/approach: The authors apply a series of statistical methods, including the Johansen test and Engle–Granger test, to derive a linear combination of cryptocurrencies that form a mean-reverting portfolio. Trading systems are designed and different trading strategies with stop-loss constraints are tested and compared according to a set of performance metrics. Findings: The paper finds cointegrated portfolios involving four cryptocurrencies: Bitcoin (BTC), Ethereum (ETH), Bitcoin Cash (BCH) and Litecoin (LTC), and the corresponding trading strategies are shown to be profitable under different configurations. Originality/value: The main contributions of the study are the use of multiple altcoins in addition to bitcoin to construct a cointegrated portfolio, and the detailed comparison of the performance of different trading strategies with and without stop-loss constraints.