On cointegration and cryptocurrency dynamics

Abstract This paper aims to model the joint dynamics of cryptocurrencies in a nonstationary setting. In particular, we analyze role cointegration relationships within large system vector error correction (VECM) framework. To enable analysis dynamic setting, propose COINtensity VECM, nonlinear VECM specification accounting for varying systemwide exposure. Our results show that are indeed cointegrated with rank four. We also find all currencies affected by these long term equilibrium relations. The nonlinearity adjustment turned out be stronger during height cryptocurrency bubble. A simple statistical arbitrage trading strategy is proposed showing great in-sample performance, whereas an out-of-sample gives reason treat caution.