Implementing and testing the Maximum Drawdown at Risk

Beatriz Vaz de Melo Mendes and Rafael Coelho Lavrado

Finance Research Letters, 2017, vol. 22, issue C, 95-100

Abstract: Financial managers are mainly concerned about long lasting accumulated large losses which may lead to massive money withdrawals. To assess this risk feeling we compute the Maximum Drawdown, the largest price loss of an investment during some fixed time period. The Maximum Drawdown at Risk has become an important risk measure for commodity trading advisors, hedge funds managers, and regulators. In this study we propose an estimation methodology based on Monte Carlo simulations and empirically validate the procedure using international stock indices. We find that this tool provides more accurate market risk control and may be used to manage portfolio exposure, being useful to practitioners and financial analysts.

Keywords: Risk management; Maximum drawdown; ARMA-GARCH; Simulations (search for similar items in EconPapers)
JEL-codes: C14 C15 C53 C58 G32 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:22:y:2017:i:c:p:95-100

DOI: 10.1016/j.frl.2017.06.001

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