Drawdown: From Practice to Theory and Back Again

Item Type Journal paper
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.

Authors Mahmoud, Ola & Goldberg, Lisa R.
Journal or Publication Title Mathematics and Financial Economics
Language English
Subjects economics
finance
Institute/School MS - Faculty of Mathematics and Statistics
HSG Classification contribution to scientific community
HSG Profile Area SEPS - Quantitative Economic Methods
Refereed Yes
Date June 2017
Publisher Springer
Place of Publication Berlin
Volume 11
Number 3
Page Range 275-297
ISSN 1862-9679
ISSN-Digital 1862-9660
Publisher DOI 10.1007/s11579-016-0181-9
Depositing User Ola Mahmoud
Date Deposited 19 Sep 2017 10:30
Last Modified 22 Nov 2017 12:39
URI: https://www.alexandria.unisg.ch/publications/251773

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Citation

Mahmoud, Ola & Goldberg, Lisa R. (2017) Drawdown: From Practice to Theory and Back Again. Mathematics and Financial Economics, 11 (3). 275-297. ISSN 1862-9679

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https://www.alexandria.unisg.ch/id/eprint/251773
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