Bitcoin-based triangular arbitrage with the Euro/U.S. dollar as a foreign futures hedge: modeling with a bivariate GARCH model

Quantitative Finance and Economics

Zheng Nan¹  Taisei Kaizoji² 

[1] 1Graduate School of Arts and Science, International Christian University, 3-10-2 Mitaka, Tokyo 181-8585, Japan;1Graduate School of Arts and Science, International Christian University, 3-10-2 Mitaka, Tokyo 181-8585, Japan
2College of Liberal Arts, International Christian University, 3-10-2 Mitaka, Tokyo 181-8585, Japan;

关键词: bitcoin| bitcoin exchange rate| triangular arbitrage| optimal hedge ratio| DCC-GARCH model;   

DOI  :  10.3934/QFE.2019.2.347

来源: DOAJ

【 摘 要 】

This paper proposes a bitcoin-based triangular arbitrage, combining foreign exchanges in the bitcoin market and reverse foreign exchange spot transactions. An FX futures contract is used to reduce exposure to risk as a hedging instrument. The returns of the portfolio are jointly modeled using a bivariate DCC-GARCH model with multivariate standardized student’s t disturbances due to the presence of leptokurtosis and fat tails observed. Based on the time-dependent covariance matrix, a dynamic optimal hedge ratio is formed, with a conditional correlation series as a by-product. Empirical results are obtained using Euros and U.S. dollars over the period from 21 April 2014 to 21 September 2018. Multiple rolling one-step-ahead forecasts are generated. The empirical results present bitcoin-based currency strategies dominate bitcoin trading in terms of risk management.

【 授权许可】

Unknown