ON A CONVEX MEASURE OF DRAWDOWN RISK

By Lisa R. Goldberg, Ola Mahmoud. 2014

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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 provide an ecient linear program for minimum CED optimization and empirically explore the dierences in risk attributions based on CED, Expected Shortfall (ES) and volatility. An

Subfields: Environmental Engineering, Management Science and Operations Research, Statistics and Probability

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