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Average Drawdown Risk and Capital Asset Pricing

Author

Listed:
  • Mohammad Reza Tavakoli Baghdadabad

    (Department of Management, Islamic Azad University, Science and Research Branch, Hesarak, Tehran, Iran 1477893855, Iran)

  • Paskalis Glabadanidis

    (Finance Discipline, University of Adelaide Business School, Level 12, 10 Pulteney Street, Adelaide SA 5005, Australia)

Abstract

Practitioners and academics have spent the past few decades debating the validity and relevance of the capital asset pricing model (CAPM). One of the attributes of the model is an estimate of risk by beta, which in equilibrium describe the behavior of mean-variance (MV) investors. In the MV framework, risk is measured by the variance of returns which is a questionable and restrictive risk measure. In contrast, the average drawdown risk is a more acceptable risk measure and can be applied to modeling an alternative behavioral hypothesis, namely mean-drawdown behavior with a replacement risk measure for diversified investors, the average drawdown beta leading to an alternative pricing model based on this beta. Our findings clearly support the average drawdown beta and the pricing model of average drawdown CAPM versus the conventional beta and CAPM in a sample of Malaysian mutual funds.

Suggested Citation

  • Mohammad Reza Tavakoli Baghdadabad & Paskalis Glabadanidis, 2013. "Average Drawdown Risk and Capital Asset Pricing," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 16(04), pages 1-21.
    • Handle: RePEc:wsi:rpbfmp:v:16:y:2013:i:04:n:s0219091513500288
    DOI: 10.1142/S0219091513500288
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    References listed on IDEAS

    as
    1. Massimiliano Caporin & Francesco Lisi, 2009. "Comparing and selecting performance measures for ranking assets," "Marco Fanno" Working Papers 0099, Dipartimento di Scienze Economiche "Marco Fanno".
    2. Manfred GILLI & Enrico SCHUMANN & Gerda CABEJ & Jonela LULA, 2010. "Replicating Hedge Fund Indices with Optimization Heuristics," Swiss Finance Institute Research Paper Series 10-22, Swiss Finance Institute.
    3. Martin Hoesli & Hamelink Foort, 2003. "The Maximum drawdown as a Risk Measure: the Role of Real Estate in the Optimal Portfolio," ERES eres2003_172, European Real Estate Society (ERES).
    4. Manfred GILLI & Enrico SCHUMANN, 2009. "An Empirical Analysis of Alternative Portfolio Selection Criteria," Swiss Finance Institute Research Paper Series 09-06, Swiss Finance Institute.
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    More about this item

    Keywords

    Mean-variance behavior; mean-drawdown behavior; drawdown risk measure; average drawdown risk measure; average drawdown beta; CAPM; average drawdown CAPM; G11; G12;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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