A differential evolution copula-based approach for a multi-period cryptocurrency portfolio optimization

Jules Clement Mba, Edson Pindza () and Ur Koumba ()
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Edson Pindza: University of Pretoria
Ur Koumba: University of Johannesburg

Financial Markets and Portfolio Management, 2018, vol. 32, issue 4, No 3, 399-418

Abstract: Abstract Recent years have seen a growing interest among investors in the new technology of blockchain and cryptocurrencies and some early investors in this new type of digital assets have made significant gains. The heuristic algorithm, differential evolution, has been advocated as a powerful tool in portfolio optimization. We propose in this study two new approaches derived from the traditional differential evolution (DE) method: the GARCH-differential evolution (GARCH-DE) and the GARCH-differential evolution t-copula (GARCH-DE-t-copula). We then contrast these two models with DE (benchmark) in single and multi-period optimizations on a portfolio consisting of five cryptoassets under the coherent risk measure CVaR constraint. Our analysis shows that the GARCH-DE-t-copula outperforms the DE and GARCH-DE approaches in both single- and multi-period frameworks. For these notoriously volatile assets, the GARCH-DE-t-copula has shown risk-control ability, hereby confirming the ability of t-copula to capture the dependence structure in the fat tail.

Keywords: Cryptocurrencies; GARCH; Differential evolution; t-copula; CVaR; Portfolio optimization (search for similar items in EconPapers)
JEL-codes: C02 G11 G17 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (8)

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DOI: 10.1007/s11408-018-0320-9

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