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Drawdown Measures And Return Moments

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  • PHILIPP M. MÖLLER

    (Chair of Finance, Georg-August-Universität Göttingen, Platz der Göttinger Sieben 3, Göttingen 37075, Germany)

Abstract

This paper provides an investigation of the effects of an investment’s return moments on drawdown-based measures of risk, including Maximum Drawdown (MDD), Conditional Drawdown (CDD), and Conditional Expected Drawdown (CED). Additionally, a new end-of-period drawdown measure is introduced, which incorporates a psychological aspect of risk perception that previous drawdown measures had been unable to capture. While simulation results indicate many similarities in the first and second moments, skewness and kurtosis affect different drawdown measures in radically different ways. Thus, users should assess whether their choice of drawdown measure accurately reflects the kind of risk they want to measure.

Suggested Citation

  • Philipp M. Möller, 2018. "Drawdown Measures And Return Moments," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 21(07), pages 1-42, November.
    • Handle: RePEc:wsi:ijtafx:v:21:y:2018:i:07:n:s0219024918500425
    DOI: 10.1142/S0219024918500425
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    Cited by:

    1. Korn, Olaf & Möller, Philipp M. & Schwehm, Christian, 2019. "Drawdown measures: Are they all the same?," CFR Working Papers 19-04, University of Cologne, Centre for Financial Research (CFR).

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