**Authors:** Masood Tadi, Jiří Witzany **Published:** _Financial Innovation_, 2025 **Link:** [DOI](https://doi.org/10.1186/s40854-024-00702-7) --- ### Summary This study presents a #Copula based trading strategy specifically designed for #Cointegration of cryptocurrency pairs. It introduces a reference asset-based copula method to improve statistical arbitrage by analyzing mispricing indexes derived from copula-based dependencies. --- ### Key Points - **Pairs Trading Strategy:** - Capitalizes on temporary price divergences between two **cointegrated cryptocurrency pairs**. - Uses **linear and nonlinear cointegration tests** to select pairs with strong co-movement. - **Copula Method:** - Traditional methods like distance and cointegration approaches only capture linear relationships. - Copulas can model **nonlinear dependencies** and **tail behavior** of asset prices. - The **reference asset-based method** uses **BTCUSDT** as a stable baseline to form spread processes for each altcoin. - **Trading Signals:** - **Mispricing Index:** A calculated value that indicates divergence from expected price relationships. - **Conditional Copula Probabilities:** Generate trading signals when price relations deviate from the modeled copula structure. - Uses **Gumbel, Student-t, and Tawn-type copulas** for capturing complex dependencies. --- ### How It Works 1. **Formation Period:** - Identify cointegrated pairs using #Engle-Granger #EG and #Kapetanios-Shin-Snell #KSS tests. - Construct #spread processes with BTCUSDT as the reference asset. 2. **Trading Period:** - Generate long/short positions based on the **copula conditional probabilities**. - Monitor divergence in real-time and close positions when thresholds are met. 3. **Backtesting:** - Evaluated on **Binance USDT-margined futures contracts** across **5-min** and **hourly** intervals. - Showed **205.9% net return** on 5-min data at optimal parameters. --- ### Strengths - Captures **nonlinear dependencies** that traditional methods miss. - More resilient to **market volatility**, particularly in #high-frequency trading. - Outperforms **distance-based** and **return-based copula methods** in terms of profitability. --- ### Limitations - Relies heavily on BTCUSDT as a reference; shifts in Bitcoin dominance could affect accuracy. - Higher transaction costs in **5-min data**, despite better returns. - Requires stable exchange APIs and low slippage for execution.