Copula-Based Trading of Cointegrated Cryptocurrency Pairs

TL;DR

This paper presents a new copula-based pairs trading strategy for cointegrated cryptocurrencies, using statistical tests and copula models to generate trading signals, which outperforms traditional buy-and-hold methods in profitability and risk management.

Contribution

It introduces a novel copula-based approach for cryptocurrency pairs trading, combining cointegration tests and copula models to improve trading signal accuracy.

Findings

Outperforms buy-and-hold strategies in profitability

Achieves better risk-adjusted returns

Effective in identifying profitable trading opportunities

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.