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Sharper asset ranking from total drawdown durations

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  • Damien Challet

Abstract

The total duration of drawdowns is shown to provide a moment-free, unbiased, efficient and robust estimator of Sharpe ratios both for Gaussian and heavy-tailed price returns. We then use this quantity to infer an analytic expression of the bias of moment-based Sharpe ratio estimators as a function of the return distribution tail exponent. The heterogeneity of tail exponents at any given time among assets implies that our new method yields significantly different asset rankings than those of moment-based methods, especially in periods large volatility. This is fully confirmed by using 20 years of historical data on 3449 liquid US equities.

Suggested Citation

  • Damien Challet, 2015. "Sharper asset ranking from total drawdown durations," Papers 1505.01333, arXiv.org, revised Feb 2017.
    • Handle: RePEc:arx:papers:1505.01333
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    Cited by:

    1. Christian Bongiorno & Damien Challet, 2022. "Reactive global minimum variance portfolios with k-BAHC covariance cleaning," The European Journal of Finance, Taylor & Francis Journals, vol. 28(13-15), pages 1344-1360, October.

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