Ledger Works has announced a significant breakthrough in cryptocurrency portfolio risk management with the introduction of a new inference model. This innovative approach allows the company to estimate asset return distributions with 90% accuracy up to four months in advance, a level of precision that greatly surpasses existing risk management models used by asset managers today.
To showcase the efficacy of their methodology, Ledger Works conducted walk-forward backtests using two distinct simulation strategies. One strategy was based on a normal distribution, while the other utilized their sophisticated inference model. Both strategies employed advanced statistical techniques for parameter estimation to ensure the highest level of precision.
The evaluation of these models focused on several key metrics: Forecasted Confidence Intervals, the Kolmogorov-Smirnov Test, Kullback-Leibler Divergence, and Skewness. Forecasted Confidence Intervals provide a range within which the estimated price is expected to fall a certain percentage of the time. The Kolmogorov-Smirnov Test measures how closely the predicted distribution aligns with observed data. Kullback-Leibler Divergence quantifies the difference between predicted and actual distributions, while Skewness assesses the asymmetry of the predicted distribution.
The results demonstrated that the Ledger Works approach provided a more accurate fit for forward asset returns compared to the normal distribution, outperforming it across all key metrics. This finding not only underscores the superior performance of the Ledger Works approach but also sets a new benchmark for backtesting similar machine learning and generative models in the future.
For professionals in the Decentralized Finance (DeFi) space, this advancement offers valuable insights and could significantly enhance risk management strategies. The full paper detailing the methodology and results provides an in-depth exploration of the findings, offering actionable insights for optimizing cryptocurrency investments. This development is a major step forward in helping investors make more informed decisions and better manage the risks associated with cryptocurrency portfolios.
As the cryptocurrency market continues to evolve rapidly, innovations such as Ledger Works' inference model are crucial for maintaining robust and effective risk management strategies. The ability to predict asset return distributions with high accuracy can provide a competitive edge, ensuring that investors are better prepared to navigate the volatility of the market.
