Maximum Drawdown and Directional Trading
نویسنده
چکیده
Abstract In this paper, we introduce new techniques how to control the maximum drawdown (MDD). One can view the maximum drawdown as a contingent claim, and price and hedge it accordingly as a derivative contract. Trading drawdown contracts or replicating them by hedging would directly address the concerns of portfolio managers who would like to insure the market drops. Similar contracts can be written on the maximum drawup (MDU). We show that buying a contract on MDD or MDU is equivalent to adopting a momentum trading strategy, while selling it corresponds to contrarian trading. We also discuss more complex products, such as plain vanilla options on the maximum drawdown or drawup, or related barrier options on MDD and MDU which we call crash and rally options, respectively.
منابع مشابه
Active Management of the Maximum Drawdown
Risk management of drawdowns and portfolio optimization with drawdown constraints is becoming increasingly important among practitioners. In this paper, we introduce new techniques how to control the maximum drawdown (MDD). One can view the maximum drawdown as a contingent claim, and price and hedge it accordingly as a derivative contract. Trading drawdown contracts or replicating them by hedgi...
متن کاملThe maximum drawdown of the Brownian motion
where X ( t ) represents the equity curve of the trading system or fund. The maximum drawdown MDD is the most widespread risk measure among money managers and hedge funds. It is often preferred over some of the other risk measures because of the tight relationship between large drawdowns and fund redemptions. Also, a large drawdown can even indicate the start of a deterioration of an otherwise ...
متن کامل(SVR-GA) and multilayer perceptron optimized with GA (MLP-GA). Experimental results show that both approaches outperform conventional trading systems without prediction and a recent fuzzy trading system in terms of final equity and maximum drawdown for Hong Kong
This paper proposes an intelligent trading system using support vector regression optimized by genetic algorithms (SVR-GA) and multilayer perceptron optimized with GA (MLP-GA). Experimental results show that both approaches outperform conventional trading systems without prediction and a recent fuzzy trading system in terms of final equity and maximum drawdown for Hong Kong Hang Seng stock index.
متن کاملContracts on Maximum and Average Drawdowns or Drawups
Risk management of drawdowns and portfolio optimization with drawdown constraints is becoming increasingly important among practitioners. In this paper, we introduce new types of contracts which depend on the maximum drawdown or on the average drawdown. Trading drawdown contracts would address directly the concerns of portfolio managers who would like to manage them. The maximum or the average ...
متن کاملCartesian Genetic Programming for Trading: A Preliminary Investigation
In this paper, a preliminary investigation of Cartesian Genetic Programming (CGP) for algorithmic intraday trading is conducted. CGP is a recent new variant of genetic programming that differs from traditional approaches in a number of ways, including being able to evolve programs with limited size and with multiple outputs. CGP is used to evolve a predictor for intraday price movements, and tr...
متن کامل