Publisher:
Humboldt-Universität zu Berlin, International Research Training Group 1792 "High Dimensional Nonstationary Time Series", Berlin
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.
