Drawdowns in stock and crypto markets. What is the best bootstrapping method?

Abstract

This paper compares bootstrap simulation approaches in the context of the maximum drawdown (MDD) risk measure for stock market and cryptocurrency returns. Our comparisons are based on the complete distribution of the MDD using stochastic dominance tests. The standard Efron (1979) bootstrap severely underestimates the true MDD. The simulation results of the moving block bootstrap approach are reasonably good as long as the stationarity problem does not become striking. The stationary bootstrap approach of Politis and Romano (1994) provides the best results. Investment practitioners should choose the Politis and Romano (1994) method as their first choice to model MDD risk.

Keywords: JEL Classification: G11, G12, G14 Bootstrap, block bootstrap, crashes, drawdowns, stock markets, crypto markets, bitcoin, serial dependence

JEL Classification: G11, G12, G14