Humboldt-Universität zu Berlin - High Dimensional Nonstationary Time Series

IRTG1792DP2020 012

On Cointegration and Cryptocurrency Dynamics

Georg Keilbar
Yanfen Zhang

This paper aims to model the joint dynamics of cryptocurrencies in a
nonstationary setting. In particular, we analyze the role of cointegration
relationships within a large system of cryptocurrencies in a vector error
correction model (VECM) framework. To enable analysis in a dynamic setting, we
propose the COINtensity VECM, a nonlinear VECM specification accounting for a
varying systemwide cointegration exposure. Our results show that
cryptocurrencies are indeed cointegrated with a cointegration rank of four. We
also find that all currencies are affected by these long term equilibrium
relations. A simple statistical arbitrage trading strategy is proposed showing a
great in-sample performance.

Cointegration, VECM, Nonstationarity, Cryptocurrencies

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