Copula-Based Trading of Cointegrated Cryptocurrency Pairs

Masood Tadi; Jiří Witzany

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arXiv · 2305.06961

Copula-Based Trading of Cointegrated Cryptocurrency Pairs

Masood Tadi·Jiří Witzany

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Abstract

This research introduces a novel pairs trading strategy based on copulas for cointegrated pairs of cryptocurrencies. To identify the most suitable pairs, the study employs linear and non-linear cointegration tests along with a correlation coefficient measure and fits different copula families to generate trading signals formulated from a reference asset for analyzing the mispricing index. 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 buy-and-hold trading strategies in terms of both profitability and risk-adjusted returns.

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Masood Tadi, Jiří Witzany. 2023-06-11. Copula-Based Trading of Cointegrated Cryptocurrency Pairs. https://arxiv.org/abs/2305.06961

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