Description

The introduction of Bitcoin derivatives, specifically the launch of futures contracts on CME in December 2017 and the introduction of cryptocurrency indices such as the CRIX or the Bloomberg Galaxy Crypto index, allows investors to hedge Bitcoin risk exposures through futures or contingent claims on indices. We investigate methods for determining an optimal hedge ratio under various dependence structures represented by copulae and using various optimality definitions based on a variety of risk measures.

Because of the volatility swings and price jumps in Bitcoin, the traditional variance-based approach to calculating hedge ratios is impractical. As a result, the techniques can be applied to a variety of risk measures, including Value-at-Risk, Expected Shortfall and more broadly, Spectral Risk Measures.

Furthermore, we use various copulas to capture the dependency between spot and future returns, such as the Gaussian, Student-t, NIG, and Archimedean copulas. Various measures of hedge effectiveness in out-of-sample tests provide insights into Bitcoin hedging practice.