A Cryptocurrency Multiple Trading Strategy with Kalman Filter Innovation Volatility Interval Forecasts

Pairs trading and multiple trading strategies are types of market-neutral strategies to use a pair or a combination of stocks and other financial instruments with co-integration or co-movements to generate potential profits, which may not be affected by the direction of the overall market. Commonly used pairs and multiple trading strategies are constructed using the Kalman Filter (KF) to utilize mean reversion in nonstationary but co-integrated asset prices. In this paper, we propose novel resilient pairs trading and multiple trading strategies using the combination of the KF algorithm and the KF innovation volatility interval forecasts using neural networks. The proposed trading strategies are implemented and investigated using the hourly prices of Bitcoin, Ethereum and Bitcoin Cash in the bear market. Those crypto assets are selected because they move in the same direction in the long term and have high trading volumes. The experimental results reveal performance for the proposed trading strategies with the upper and lower trading intervals using KF innovation volatility interval forecasts superior to that of the trading strategies with upper and lower trading bands using KF innovation volatility point forecasts. The performance and robustness of the proposed trading strategies using a proper assumption of transaction costs have also been examined. The strategies using innovation volatility interval forecasts consistently generate higher profits and a more robust number of transactions with or without transaction costs than those using innovation volatility point forecasts.