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Return
Ups and (draw) downs
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DOI：10.1016/j.ijforecast.2025.07.008.png)
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Abstract
En 中文
The concept of a drawdown quantifies the potential loss in the value of a financial asset when it deviates from its historical peak. It plays an important role in evaluating market risk, portfolio construction, assessing risk-adjusted performance, and trading strategies. We consider a novel measurement framework that produces, along with the drawdown and its dual (the drawup), two Markov chain processes representing the current lead time with respect to the running maximum and minimum, i.e. the number of time units elapsed from the most recent peak and trough. Together with the distribution of asset returns, they determine the properties of the drawdown and drawup time series, in terms of size, serial correlation, persistence, and duration. Furthermore, they form the foundation of a new algorithm for dating the peaks and troughs of the price process delimiting bear and bull market phases. We then turn our attention to the problem of predicting the drawdown out-of-sample.
Keywords:
Financial time Series
Forecasting risk measures
Dating bear and bull markets
Markov Chains
Conditional drawdown at risk
Nonlinear filters
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