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Hedging cryptos with Bitcoin futures

Author

Listed:
  • Liu, Francis
  • Packham, Natalie
  • Lu, Meng-Jou
  • Härdle, Wolfgang

Abstract

The introduction of derivatives on Bitcoin enables investors to hedge risk exposures in cryptocurrencies. Because of volatility swings and jumps in cryptocurrency prices, the traditional variance-based approach to obtain hedge ratios is infeasible. As a consequence, we consider two extensions of the traditional approach: first, different dependence structures are modelled by different copulae, such as the Gaussian, Student-t, Normal Inverse Gaussian and Archimedean copulae; second, different risk measures, such as value-at-risk, expected shortfall and spectral risk measures are employed to and the optimal hedge ratio. Extensive out-of-sample tests give insights in the practice of hedging various cryptos and crypto indices, including Bitcoin, Ethereum, Cardano, the CRIX index and a number of crypto-portfolios in the time period December 2017 until May 2021. Evidences show that BTC futures can effectively hedge BTC and BTC-involved indices. This promising result is consistent across different risk measures and copulae except for Frank. On the other hand, we observe complex and diverse dependence structures between BTC-not-involved assets and the futures. As a consequence, results of hedging other assets and indices are diverse and, in some occasions, not ideal.

Suggested Citation

  • Liu, Francis & Packham, Natalie & Lu, Meng-Jou & Härdle, Wolfgang, 2021. "Hedging cryptos with Bitcoin futures," IRTG 1792 Discussion Papers 2022-001, Humboldt University of Berlin, International Research Training Group 1792 "High Dimensional Nonstationary Time Series".
  • Handle: RePEc:zbw:irtgdp:2022001
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    References listed on IDEAS

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    Cited by:

    1. Zuo Xiaorui & Chen Yao-Tsung & Härdle Wolfgang Karl, 2024. "Emoji driven crypto assets market reactions," Management & Marketing, Sciendo, vol. 19(2), pages 158-178.

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    More about this item

    Keywords

    Cryptocurrencies; risk management; hedging; copulas;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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