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Minimum-variance hedging of Bitcoin inverse futures

Author

Listed:
  • Jun Deng
  • Huifeng Pan
  • Shuyu Zhang
  • Bin Zou

Abstract

We formulate an optimal hedging problem of Bitcoin inverse futures under the minimum-variance framework. We obtain the optimal hedging strategy in closed forms for both short and long hedges and compute hedging effectiveness under the optimal strategy. Our empirical analyses show that the optimal hedging strategy achieves superior effectiveness in reducing risk and outperforms the naïve hedge in all scenarios.

Suggested Citation

  • Jun Deng & Huifeng Pan & Shuyu Zhang & Bin Zou, 2020. "Minimum-variance hedging of Bitcoin inverse futures," Applied Economics, Taylor & Francis Journals, vol. 52(58), pages 6320-6337, December.
    • Handle: RePEc:taf:applec:v:52:y:2020:i:58:p:6320-6337
    DOI: 10.1080/00036846.2020.1789549
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    Citations

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    Cited by:

    1. Carol Alexander & Jun Deng & Bin Zou, 2021. "Hedging with Bitcoin Futures: The Effect of Liquidation Loss Aversion and Aggressive Trading," Papers 2101.01261, arXiv.org, revised Aug 2021.
    2. Alexander, Carol & Deng, Jun & Zou, Bin, 2023. "Hedging with automatic liquidation and leverage selection on bitcoin futures," European Journal of Operational Research, Elsevier, vol. 306(1), pages 478-493.
    3. Alexander, Carol & Deng, Jun & Feng, Jianfen & Wan, Huning, 2023. "Net buying pressure and the information in bitcoin option trades," Journal of Financial Markets, Elsevier, vol. 63(C).
    4. Jun Deng & Huifeng Pan & Shuyu Zhang & Bin Zou, 2021. "Optimal Bitcoin trading with inverse futures," Annals of Operations Research, Springer, vol. 304(1), pages 139-163, September.
    5. Weige Huang & Xiang Gao, 2023. "Forecasting Bitcoin Futures: A Lasso-BMA Two-Step Predictor Selection for Investment and Hedging Strategies," SAGE Open, , vol. 13(1), pages 21582440231, January.
    6. Zhiyong Cheng & Jun Deng & Tianyi Wang & Mei Yu, 2021. "Liquidation, leverage and optimal margin in bitcoin futures markets," Applied Economics, Taylor & Francis Journals, vol. 53(47), pages 5415-5428, October.
    7. Carol Alexander & Jun Deng & Jianfen Feng & Huning Wan, 2021. "Net Buying Pressure and the Information in Bitcoin Option Trades," Papers 2109.02776, arXiv.org, revised Mar 2022.
    8. Alexandros Koulis & Constantinos Kyriakopoulos, 2021. "Hedge ratio estimation: A note on the Bitcoin future contract," Bulletin of Applied Economics, Risk Market Journals, vol. 8(2), pages 125-131.

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