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Financial Markets and Portfolio Management

, Volume 32, Issue 4, pp 399–418 | Cite as

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

  • Jules Clement Mba
  • Edson Pindza
  • Ur Koumba
Article
  • 53 Downloads

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 

JEL Classification

C02 G11 G17 

Notes

Acknowledgements

We would like to thank the anonymous referee for the valuable comments to improve the quality of this paper.

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Copyright information

© Swiss Society for Financial Market Research 2018

Authors and Affiliations

  1. 1.Department of Pure and Applied MathematicsUniversity of JohannesburgAuckland ParkRepublic of South Africa
  2. 2.Department of Mathematics and Applied MathematicsUniversity of PretoriaPretoriaRepublic of South Africa
  3. 3.Achieversklub School of Cryptocurrency and EntrepreneurshipRosebankSouth Africa

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