Humboldt-Universität zu Berlin - High Dimensional Nonstationary Time Series

IRTG1792DP2022 001

Hedging Cryptos with Bitcoin Futures

Francis Liu
Natalie Packham
Meng-Jou Lu
Wolfgang Karl Härdle

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.

Cryptocurrencies, risk management, hedging, copulas

JEL Classification:
G11, G13