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

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.