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Constrained Max Drawdown: a Fast and Robust Portfolio Optimization Approach

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  • Albert Dorador

Abstract

We propose an alternative linearization to the classical Markowitz quadratic portfolio optimization model, based on maximum drawdown. This model, which minimizes maximum portfolio drawdown, is particularly appealing during times of financial distress, like during the COVID-19 pandemic. In addition, we will present a Mixed-Integer Linear Programming variation of our new model that, based on our out-of-sample results and sensitivity analysis, delivers a more profitable and robust solution with a 200 times faster solving time compared to the standard Markowitz quadratic formulation.

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  • Albert Dorador, 2024. "Constrained Max Drawdown: a Fast and Robust Portfolio Optimization Approach," Papers 2401.02601, arXiv.org.
    • Handle: RePEc:arx:papers:2401.02601
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    1. Hiroshi Konno & Hiroaki Yamazaki, 1991. "Mean-Absolute Deviation Portfolio Optimization Model and Its Applications to Tokyo Stock Market," Management Science, INFORMS, vol. 37(5), pages 519-531, May.
    2. A. Chekhlov & S. Uryasev & M. Zabarankin, 2004. "Portfolio Optimization With Drawdown Constraints," World Scientific Book Chapters, in: Panos M Pardalos & Athanasios Migdalas & George Baourakis (ed.), Supply Chain And Finance, chapter 13, pages 209-228, World Scientific Publishing Co. Pte. Ltd..
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