Probability distribution of drawdowns in risky investments

Sergei Maslov, Yi Cheng Zhang

Research output: Contribution to journalArticle

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 risk exposure is Kelly-optimal, the exponent of this power law has the borderline value of 2, i.e. the average drawdown is just about to diverge.

Original languageEnglish (US)
Pages (from-to)232-241
Number of pages10
JournalPhysica A: Statistical Mechanics and its Applications
Volume262
Issue number1-2
DOIs
StatePublished - Jan 1 1999
Externally publishedYes

ASJC Scopus subject areas

  • Statistics and Probability
  • Condensed Matter Physics

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