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A General Framework for Portfolio Theory. Part II: Drawdown Risk Measures

Author

Listed:
  • Stanislaus Maier-Paape

    (Institut für Mathematik, RWTH Aachen University, 52062 Aachen, Germany)

  • Qiji Jim Zhu

    (Department of Mathematics, Western Michigan University, Kalamazoo, MI 49008, USA)

Abstract

The aim of this paper is to provide several examples of convex risk measures necessary for the application of the general framework for portfolio theory of Maier-Paape and Zhu (2018), presented in Part I of this series. As an alternative to classical portfolio risk measures such as the standard deviation, we, in particular, construct risk measures related to the “current” drawdown of the portfolio equity. In contrast to references Chekhlov, Uryasev, and Zabarankin (2003, 2005), Goldberg and Mahmoud (2017), and Zabarankin, Pavlikov, and Uryasev (2014), who used the absolute drawdown, our risk measure is based on the relative drawdown process. Combined with the results of Part I, Maier-Paape and Zhu (2018), this allows us to calculate efficient portfolios based on a drawdown risk measure constraint.

Suggested Citation

  • Stanislaus Maier-Paape & Qiji Jim Zhu, 2018. "A General Framework for Portfolio Theory. Part II: Drawdown Risk Measures," Risks, MDPI, vol. 6(3), pages 1-31, August.
    • Handle: RePEc:gam:jrisks:v:6:y:2018:i:3:p:76-:d:162453
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    References listed on IDEAS

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    1. Alexei Chekhlov & Stanislav Uryasev & Michael Zabarankin, 2005. "Drawdown Measure In Portfolio Optimization," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 8(01), pages 13-58.
    2. R. Rockafellar & Stan Uryasev & Michael Zabarankin, 2006. "Generalized deviations in risk analysis," Finance and Stochastics, Springer, vol. 10(1), pages 51-74, January.
    3. Zabarankin, Michael & Pavlikov, Konstantin & Uryasev, Stan, 2014. "Capital Asset Pricing Model (CAPM) with drawdown measure," European Journal of Operational Research, Elsevier, vol. 234(2), pages 508-517.
    4. Andreas Hermes & Stanislaus Maier-Paape, 2017. "Existence and Uniqueness for the Multivariate Discrete Terminal Wealth Relative," Papers 1703.00476, arXiv.org.
    5. Andreas Hermes & Stanislaus Maier-Paape, 2017. "Existence and Uniqueness for the Multivariate Discrete Terminal Wealth Relative," Risks, MDPI, vol. 5(3), pages 1-19, August.
    6. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    7. Lisa R. Goldberg & Ola Mahmoud, 2014. "Drawdown: From Practice to Theory and Back Again," Papers 1404.7493, arXiv.org, revised Sep 2016.
    8. Rockafellar, R. Tyrrell & Uryasev, Stan & Zabarankin, Michael, 2006. "Master funds in portfolio analysis with general deviation measures," Journal of Banking & Finance, Elsevier, vol. 30(2), pages 743-778, February.
    9. Rockafellar, R. Tyrrell & Uryasev, Stanislav, 2002. "Conditional value-at-risk for general loss distributions," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1443-1471, July.
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    Cited by:

    1. Giovanni Masala & Filippo Petroni, 2023. "Drawdown risk measures for asset portfolios with high frequency data," Annals of Finance, Springer, vol. 19(2), pages 265-289, June.
    2. Marcos López de Prado & Ralph Vince & Qiji Jim Zhu, 2019. "Optimal Risk Budgeting under a Finite Investment Horizon," Risks, MDPI, vol. 7(3), pages 1-15, August.
    3. Sagara Dewasurendra & Pedro Judice & Qiji Zhu, 2019. "The Optimum Leverage Level of the Banking Sector," Risks, MDPI, vol. 7(2), pages 1-30, May.
    4. Attila Bányai & Tibor Tatay & Gergő Thalmeiner & László Pataki, 2024. "Optimising Portfolio Risk by Involving Crypto Assets in a Volatile Macroeconomic Environment," Risks, MDPI, vol. 12(4), pages 1-21, April.
    5. Stanislaus Maier-Paape & Andreas Platen & Qiji Jim Zhu, 2019. "A General Framework for Portfolio Theory. Part III: Multi-Period Markets and Modular Approach," Risks, MDPI, vol. 7(2), pages 1-31, June.
    6. Leonie Violetta Brinker, 2021. "Minimal Expected Time in Drawdown through Investment for an Insurance Diffusion Model," Risks, MDPI, vol. 9(1), pages 1-18, January.

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