Using Maximum Drawdowns to Capture Tail Risk
Posted: Thu Mar 07, 2013 1:50 am
We propose the use of maximum drawdown, the maximum peak to trough loss across a time series of compounded returns, as a simple method to capture an element of risk unnoticed by linear factor models: tail risk. Unlike other tail-risk metrics, maximum drawdown is intuitive and easy-to-calculate. We look at maximum drawdowns to assess tail risks associated with market neutral strategies identified in the academic literature. Our evidence suggests that academic anomalies are not anomalous: all strategies endure large drawdowns at some point in the time series. Many of these losses would trigger margin calls and investor withdrawals, forcing an investor to liquidate.
https://papers.ssrn.com/sol3/papers.cfm ... id=2226689
https://papers.ssrn.com/sol3/papers.cfm ... id=2226689