IRTG1792DP2022 001
Hedging Cryptos with Bitcoin Futures
Francis Liu
Natalie Packham
Meng-Jou Lu
Wolfgang Karl Härdle
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.
Keywords:
Cryptocurrencies, risk management, hedging, copulas
JEL Classification:
G11, G13