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Sharper asset ranking from total drawdown durations

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  • Damien Challet

    (MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec, FiQuant - Chaire de finance quantitative - MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec)

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, 2017. "Sharper asset ranking from total drawdown durations," Post-Print hal-01149704, HAL.
    • Handle: RePEc:hal:journl:hal-01149704
    DOI: 10.1080/1350486X.2017.1297728
    Note: View the original document on HAL open archive server: https://hal.science/hal-01149704
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    References listed on IDEAS

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    1. Damien Challet, 2015. "One- and two-sample nonparametric tests for the signal-to-noise ratio based on record statistics," Papers 1502.05367, arXiv.org, revised Jul 2015.
    2. Bollerslev, Tim, 1987. "A Conditionally Heteroskedastic Time Series Model for Speculative Prices and Rates of Return," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 542-547, August.
    3. Auer, Benjamin R. & Schuhmacher, Frank, 2013. "Robust evidence on the similarity of Sharpe ratio and drawdown-based hedge fund performance rankings," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 24(C), pages 153-165.
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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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