Footnote:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments May 16, 2014 erstellt
Description:
Maximum drawdown refers to the largest cumulative loss of a portfolio within a given time interval. While it has been used by investment professionals as an important measure of portfolio risk for many years, its nature and its implications for asset pricing have not been well understood. The first part of the paper presents a theoretical justification for using maximum drawdown as a portfolio risk measure. Our argument is based on liquidity preference of Keynes and rank dependent utility of Quiggin. We extend the Markowitz portfolio problem by including expected maximum drawdown as the third argument of the objective function. The second part of the paper investigates asset pricing implications. The marginal contribution of an individual asset to portfolio maximum drawdown — we call this “co-drawdown” — plays an important role. In an extended CAPM, there exists a linear relationship between expected return and expected co-drawdown. We interpret expected co-drawdown as a downside risk measure, and compare its properties to those of other popular downside risk measures