Effective return, risk aversion and drawdowns

Michel Dacorogna, Ramazan Gencay, Ulrich A. Müller and Olivier V. Pictet

Physica A: Statistical Mechanics and its Applications, 2001, vol. 289, issue 1, 229-248

Abstract: We derive two risk-adjusted performance measures for investors with risk averse preferences. Maximizing these measures is equivalent to maximizing the expected utility of an investor. The first measure, Xeff, is derived assuming a constant risk aversion while the second measure, Reff, is based on a stronger risk aversion to clustering of losses than of gains. The clustering of returns is captured through a multi-horizon framework. The empirical properties of Xeff, Reff are studied within the context of real-time trading models for foreign exchange rates and their properties are compared to those of more traditional measures like the annualized return, the Sharpe Ratio and the maximum drawdown. Our measures are shown to be more robust against clustering of losses and have the ability to fully characterize the dynamic behaviour of investment strategies.

Keywords: Performance measures; Sharpe ratio; Effective return; Drawdown (search for similar items in EconPapers)
Date: 2001
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:289:y:2001:i:1:p:229-248

DOI: 10.1016/S0378-4371(00)00462-3

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