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Copula Signals for Cointegrated Cryptocurrency Pairs Trading

Article arXiv papers · Author: Masood Tadi et al.
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Summary

This research develops a pairs-trading approach for cointegrated cryptocurrency pairs using copulas to model dependence and identify relative mispricing. Pair selection combines linear and nonlinear cointegration tests with a correlation measure. The strategy fits different copula families and derives trading signals from a reference asset through a mispricing index.

The authors back-test the method using different position-entry triggers and assess both returns and risks. They report that the approach outperforms buy-and-hold strategies in profitability and risk-adjusted returns. The description does not provide the assets, test period, detailed performance measures, transaction costs, or evidence from live trading. Results therefore indicate historical back-test performance only, and their robustness and practical tradability cannot be judged from the available account.

Key ideas

  • The strategy trades cointegrated cryptocurrency pairs using copula-based dependence models.
  • Pair selection combines linear and nonlinear cointegration tests with correlation measures.
  • A mispricing index derived from a reference asset generates trading signals.
  • Back-tests across different entry triggers reportedly outperform buy-and-hold on returns and risk-adjusted returns.

Tags

CryptoPairs tradingStatisticsBacktesting
Full text
# Copula-Based Trading of Cointegrated Cryptocurrency Pairs


# Copula-Based Trading of Cointegrated Cryptocurrency Pairs









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.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.