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

38 Pages Posted: 30 Apr 2024 Last revised: 24 Jun 2024

See all articles by Hubert Dichtl

Hubert Dichtl

dichtl research & consulting GmbH; University of Hamburg

Wolfgang Drobetz

University of Hamburg

Tizian Otto

University of Hamburg

Date Written: April 30, 2024

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

Suggested Citation

Dichtl, Hubert and Drobetz, Wolfgang and Otto, Tizian, Drawdowns in stock and crypto markets. What is the best bootstrapping method? (April 30, 2024). Available at SSRN: https://ssrn.com/abstract=4811952 or http://dx.doi.org/10.2139/ssrn.4811952

Hubert Dichtl

dichtl research & consulting GmbH ( email )

Am Bahnhof 7
65812 Bad Soden am Taunus
Germany

HOME PAGE: http://www.dichtl-research-consulting.de

University of Hamburg ( email )

Moorweidenstr. 18
Hamburg, 20148
Germany

Wolfgang Drobetz (Contact Author)

University of Hamburg ( email )

Moorweidenstrasse 18
Hamburg, 20148
Germany

Tizian Otto

University of Hamburg ( email )

Moorweidenstraße 18
Hamburg, 20148
Germany

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