Sharper asset ranking from total drawdown durations

Damien Challet

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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.

Keywords: Sharpe ratio; estimator; efficiency; robustness; heavy tails; Asset ranking; drawdowns; unbiased estimator (search for similar items in EconPapers)
Date: 2017-06-06
Note: View the original document on HAL open archive server: https://hal.science/hal-01149704
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Published in Applied Mathematical Finance, 2017, 24 (1), pp.1-22. ⟨10.1080/1350486X.2017.1297728⟩

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Journal Article: Sharper asset ranking from total drawdown durations (2017)
Working Paper: Sharper asset ranking from total drawdown durations (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01149704

DOI: 10.1080/1350486X.2017.1297728

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