Drawdown: from practice to theory and back again
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Publication:1679554
DOI10.1007/S11579-016-0181-9zbMATH Open1415.91260arXiv1404.7493OpenAlexW3121290254MaRDI QIDQ1679554FDOQ1679554
Publication date: 9 November 2017
Published in: Mathematics and Financial Economics (Search for Journal in Brave)
Abstract: Maximum drawdown, the largest cumulative loss from peak to trough, is one of the most widely used indicators of risk in the fund management industry, but one of the least developed in the context of measures of risk. We formalize drawdown risk as Conditional Expected Drawdown (CED), which is the tail mean of maximum drawdown distributions. We show that CED is a degree one positive homogenous risk measure, so that it can be linearly attributed to factors; and convex, so that it can be used in quantitative optimization. We empirically explore the differences in risk attributions based on CED, Expected Shortfall (ES) and volatility. An important feature of CED is its sensitivity to serial correlation. In an empirical study that fits AR(1) models to US Equity and US Bonds, we find substantially higher correlation between the autoregressive parameter and CED than with ES or with volatility.
Full work available at URL: https://arxiv.org/abs/1404.7493
Recommendations
Applications of statistics to actuarial sciences and financial mathematics (62P05) Portfolio theory (91G10)
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Cited In (13)
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- Effective return, risk aversion and drawdowns
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