Probability Distribution of Drawdowns in Risky Investments

Posted: 31 Jul 2000

See all articles by Sergei Maslov

Sergei Maslov

Brookhaven National Laboratory - Department of Physics

Yi-Cheng Zhang

Universite de Fribourg

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Abstract

We study the risk criterion for investments based on the drawdown from the maximal value of the capital in the past. Depending on investor's risk attitude, thus his risk exposure, we find that the distribution of these drawdowns follows a general power law. In particular, if the riskexposure is Kelly-optimal, the exponent of this power law has the borderline value of 2, i.e. theaverage drawdown is just about to diverge.

JEL Classification: D81, G12

Suggested Citation

Maslov, Sergei and Zhang, Yi-Cheng, Probability Distribution of Drawdowns in Risky Investments. Available at SSRN: https://ssrn.com/abstract=217309

Sergei Maslov (Contact Author)

Brookhaven National Laboratory - Department of Physics ( email )

Upton, NY 11973-5000
United States
631-344-3742 (Phone)
631-344-2918 (Fax)

Yi-Cheng Zhang

Universite de Fribourg

Institut de Physique Theorique
Fribourg, FR 1700
Switzerland

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