Export file:


  • RIS(for EndNote,Reference Manager,ProCite)
  • BibTex
  • Text


  • Citation Only
  • Citation and Abstract

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

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

Special Issues: Advances in Forecasting Financial and Macroeconomic Variables Using Econometric Methods

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.
  Article Metrics


1.Akram QF, Rime D, Sarno L (2008) Arbitrage in the foreign exchange market: Turning on the microscope. J Int Econ 76: 237–253.    

2.Ali R, Barrdear J, Clews R, et al. (2014) The Economics of Digital Currencies (SSRN Scholarly Paper No. ID 2499418). Available from: https://papers.ssrn.com/abstract=2499418.

3.Baillie RT, Myers RJ (1991) Bivariate GARCH estimation of the optimal commodity futures hedge. J Appl Econ 6: 109–124.    

4.Böhme R, Christin N, Edelman B, et al. (2015) Bitcoin: Economics, technology, and governance. J Econ Perspect 29: 213–238.    

5.Bouri E, Molnár P, Azzi G, et al. (2017) On the hedge and safe haven properties of Bitcoin: Is it really more than a diversifier?. Financ Res Lett 20: 192–198.    

6.Briere M, Oosterlinck K, Szafarz A (2013) Virtual Currency, Tangible Return: Portfolio Diversification with Bitcoins (SSRN Scholarly Paper No. ID 2324780). Available from: https://papers.ssrn.com/abstract=2324780.

7.Brownlees CT, Engle RF, Kelly BT (2011) A practical guide to volatility forecasting through calm and storm. Available at SSRN 1502915.

8.Buchholz M, Delaney J, Warren J, et al. (2012) Bits and Bets, Information, Price Volatility, and Demand for Bitcoin. Economics 312: 2–48.

9.Cheah ET, Fry J (2015) Speculative bubbles in Bitcoin markets? An empirical investigation into the fundamental value of Bitcoin. Econ Lett 130: 32–36.

10.Ciaian P, Rajcaniova M, Kancs d'Artis (2016) The economics of BitCoin price formation. Appl Econ 48: 1799–1815.    

11.Corbet S, Lucey B, Peat M, et al. (2018) Bitcoin Futures-What use are they? Econ Lett 172: 23–27.    

12.Dong H, Dong W (2015) Bitcoin: Exchange rate parity, risk premium, and arbitrage stickiness.

13.Engle R (2002) Dynamic conditional correlation: A simple class of multivariate generalized autoregressive conditional heteroskedasticity models. J Bus Econ Stat 20: 339–350.    

14.Engle RF, Sheppard K (2001) Theoretical and empirical properties of dynamic conditional correlation multivariate GARCH. Nat Bur Econ Res.

15.Glaser F, Zimmermann K, Haferkorn M, et al. (2014) Bitcoin-asset or currency? revealing users' hidden intentions. Available from: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2425247.

16.Grossman SJ, Stiglitz JE (1980) On the impossibility of informationally efficient markets. Am Econ Rev 70: 393–408.

17.Hong K (2017) Bitcoin as an alternative investment vehicle. Inf Technol Manage 18: 265–275.    

18.Hsln CW, Kuo J, Lee CF (1994) A new measure to compare the hedging effectiveness of foreign currency futures versus options. J Futures Mark 14: 685–707.    

19.Kristoufek L (2013) BitCoin meets Google Trends and Wikipedia: Quantifying the relationship between phenomena of the Internet era. Sci Rep 3: 3415.    

20.Li Z, Dong H, Huang Z, et al. (2018) Asymmetric effects on risks of Virtual Financial Assets (VFAs) in different regimes: A Case of Bitcoin. Quant Financ Econ 2: 860–883.    

21.Luther WJ (2016) Bitcoin and the Future of Digital Payments. Indep Rev 20: 397.

22.Nakamoto S (2008) Bitcoin: A peer-to-peer electronic cash system.

23.Nan Z, Kaizoji T (2018a) Market Efficiency of the Bitcoin Exchange Rate: Weak and Semi-Strong Form Tests with the Spot, Futures and Forward Foreign Exchange Rates of the U.S. Dollar against the Euro. Int Rev Financ Anal: In press.

24.Nan Z, Kaizoji T (2018b) The optimal foreign exchange futures hedge on the bitcoin exchange rate: an application to the U.S. dollar and the Euro, In press.

25.Pichl L, Kaizoji T (2017) Volatility Analysis of Bitcoin Price Time Series. Quant Econ Financ 1: 474–485.    

26.Patton AJ (2011) Volatility forecast comparison using imperfect volatility proxies. J Econometrics 160: 246–256.    

27.Van Wijk D (2013) What can be expected from the BitCoin. Erasmus Universiteit Rotterdam. Available from: https://thesis.eur.nl/pub/14100/Final-version-Thesis-Dennis-van-Wijk.pdf.

28.Yermack D (2013) Is Bitcoin a real currency? An economic appraisal. Available from: http://www.nber.org/papers/w19747.

© 2019 the Author(s), licensee AIMS Press. This is an open access article distributed under the terms of the Creative Commons Attribution Licese (http://creativecommons.org/licenses/by/4.0)

Download full text in PDF

Export Citation

Article outline

Show full outline
Copyright © AIMS Press All Rights Reserved