Sharper asset ranking from total drawdown durations

DOI10.1080/1350486X.2017.1297728MaRDI QIDQ103808zbMATHOpenAlexFDO

Authors Damien Challet, Damien Challet

Publication date 6 May 2015

Published in Applied Mathematical Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1505.01333

zbMATH Keywords

heavy tailsasset rankingdrawdownsSharpe ratiounbiased estimator

Mathematics Subject Classification ID

Exact distribution theory in statistics (62E15) Statistics of extreme values; tail inference (62G32) Applications of statistics to actuarial sciences and financial mathematics (62P05)

Abstract: The total duration of drawdowns is shown to provide a moment-free, unbiased, efficient and robust estimator of Sharpe ratios both for Gaussian and heavy-tailed price returns. We then use this quantity to infer an analytic expression of the bias of moment-based Sharpe ratio estimators as a function of the return distribution tail exponent. The heterogeneity of tail exponents at any given time among assets implies that our new method yields significantly different asset rankings than those of moment-based methods, especially in periods large volatility. This is fully confirmed by using 20 years of historical data on 3449 liquid US equities.

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Cited in

(8)

• Does anything beat 5-minute RV? A comparison of realized measures across multiple asset classes
• Universal record statistics for random walks and Lévy flights with a nonzero staying probability
• Record statistics for random walks and Lévy flights with resetting
• Time since maximum of Brownian motion and asymmetric Lévy processes
• Portfolio Benchmarking Under Drawdown Constraint and Stochastic Sharpe Ratio
• Record statistics of a strongly correlated time series: random walks and Lévy flights
• sharpeRratio
• Portfolio models for optimizing drawdown duration

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