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Drawdown: From Practice to Theory and Back Again

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

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Official URL: https://edoc.unibas.ch/74252/

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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.
Faculties and Departments:06 Faculty of Business and Economics > Departement Wirtschaftswissenschaften > Professuren Wirtschaftswissenschaften > Corporate Finance (Mahmoud)
UniBasel Contributors:Mahmoud, Ola
Item Type:Article, refereed
Article Subtype:Research Article
Publisher:Springer
e-ISSN:1862-9660
Note:Publication type according to Uni Basel Research Database: Journal article
Last Modified:03 Apr 2020 19:27
Deposited On:03 Apr 2020 19:27

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