1-s2.0-S0377221722005975-main.pdf (1.2 MB)
Hedging with automatic liquidation and leverage selection on bitcoin futures
journal contribution
posted on 2023-06-10, 04:19 authored by Carol AlexanderCarol Alexander, Jun Deng, Bin ZouBitcoin derivatives positions are maintained with a self-selected margin, which is often too low to avoid automatic liquidation by the exchange, without notice, especially during periods of excessive volatility. Indeed, according to CryptoQuant, almost $80 billion of positions on centralised exchanges were liquidated during 2021, that is an average of over $200 million per day. So hedgers of bitcoin price risk should account for the possibility of automatic liquidation when taking positions on bitcoin futures. We derive a semi-closed form for an optimal hedging strategy with dual objectives– to minimize both the variance of the hedged portfolio and the probability of liquidation due to insufficient collateral. The solution depends on the statistical characteristics of the spot and futures extreme returns, and other parameters that characterize the hedger by choice of leverage, loss aversion and collateral management. An empirical analysis based on minute-level data compares the performance of the major direct and inverse bitcoin hedging instruments traded on five major exchanges.
History
Publication status
- Published
File Version
- Published version
Journal
European Journal of Operational ResearchISSN
0377-2217Publisher
ElsevierExternal DOI
Issue
1Volume
306Page range
478-493Department affiliated with
- Accounting and Finance Publications
Full text available
- Yes
Peer reviewed?
- Yes
Legacy Posted Date
2022-07-26First Open Access (FOA) Date
2022-08-18First Compliant Deposit (FCD) Date
2022-07-24Usage metrics
Categories
No categories selectedKeywords
Licence
Exports
RefWorks
BibTeX
Ref. manager
Endnote
DataCite
NLM
DC