Portfolio Risk Assessment under Dynamic (Equi)Correlation and Semi-Nonparametric Estimation: An Application to Cryptocurrencies

Author:

Jiménez Inés,Mora-Valencia AndrésORCID,Ñíguez Trino-Manuel,Perote JavierORCID

Abstract

The semi-nonparametric (SNP) modeling of the return distribution has been proved to be a flexible and accurate methodology for portfolio risk management that allows two-step estimation of the dynamic conditional correlation (DCC) matrix. For this SNP-DCC model, we propose a stepwise procedure to compute pairwise conditional correlations under bivariate marginal SNP distributions, overcoming the curse of dimensionality. The procedure is compared to the assumption of dynamic equicorrelation (DECO), which is a parsimonious model when correlations among the assets are not significantly different but requires joint estimation of the multivariate SNP model. The risk assessment of both methodologies is tested for a portfolio of cryptocurrencies by implementing backtesting techniques and for different risk measures: value-at-risk, expected shortfall and median shortfall. The results support our proposal showing that the SNP-DCC model has better performance for lower confidence levels than the SNP-DECO model and is more appropriate for portfolio diversification purposes.

Publisher

MDPI AG

Subject

General Mathematics,Engineering (miscellaneous),Computer Science (miscellaneous)

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