Probability Distribution of Drawdowns in Risky Investments
Posted: 31 Jul 2000
There are 2 versions of this paper
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: Suggested Citation
Maslov, Sergei and Zhang, Yi-Cheng, Probability Distribution of Drawdowns in Risky Investments. Available at SSRN: https://ssrn.com/abstract=217309
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