Publication Type

Journal Article

Version

submittedVersion

Publication Date

3-2023

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 may not be suitable for hedgers. In this work, 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 find the optimal hedge ratio. Extensive out-of-sample tests using the data from the time period December 2017 until May 2021 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. Evidence shows that BTC futures can effectively hedge BTC and BTC-involved indices. This promising result is consistent across different risk measures and copulae except for the Frank copula. On the other hand, we observe complex and diverse dependence structures between non-BTC-related cryptocurrencies and the BTC futures. As a consequence, the hedge performance of non-BTC-related cryptocurrencies is mixed and even suitable for some assets.

Keywords

Cryptocurrencies, Risk management, Hedging copulas

Discipline

Finance | Finance and Financial Management

Publication

Quantitative Finance

First Page

819

Last Page

841

ISSN

1469-7688

Publisher

Taylor and Francis Group

Embargo Period

2-26-2024

Additional URL

https://doi.org/10.1080/14697688.2023.2187316

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