Effective Return, Risk Aversion and Drawdowns

Olsen & Associates Working Paper No. 321

24 Pages Posted: 20 Jul 1999

See all articles by Michel M. Dacorogna

Michel M. Dacorogna

DEAR-Consulting

Ramazan Gencay

Simon Fraser University

Ulrich A. Müller

Olsen & Associates

Olivier V. Pictet

Pictet Asset Management

Date Written: March 1999

Abstract

We derive two risk adjusted performance measures for investors with risk averse preferences. Maximizing these measures is equivalent to maximizing the expected utility of an investor. The first measure, X(eff), is derivedassuming a constant risk aversion while the second measure, R(eff),is based on a stronger risk aversion to clustering of losses than of gains. The clustering of returns is captured through a multi-horizon framework. The empirical properties of X(eff), R(eff) are studied within the context of real-time trading models for foreign exchange rates and their properties are compared to those of more traditional measures like the annualized return, the Sharpe Ratio and the maximum drawdown. Our measures are shown to be more robust against clustering of losses and has the ability to fully characterize the dynamic behavior of investment strategies.

JEL Classification: C45, C52, C53, G14

Suggested Citation

Dacorogna, Michel M. and Gencay, Ramazan and Müller, Ulrich A. and Pictet, Olivier V., Effective Return, Risk Aversion and Drawdowns (March 1999). Olsen & Associates Working Paper No. 321, Available at SSRN: https://ssrn.com/abstract=162232 or http://dx.doi.org/10.2139/ssrn.162232

Michel M. Dacorogna (Contact Author)

DEAR-Consulting ( email )

Scheuchzerstrasse 160
Zurich, 8057
Switzerland
+41795447327 (Phone)

Ramazan Gencay

Simon Fraser University ( email )

Department of Economics
8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

Ulrich A. Müller

Olsen & Associates ( email )

Seefeldstrasse 233
CH-8008 Zurich
Switzerland
+41 (1) 386 48 16 (Phone)
+41 (1) 422 22 82 (Fax)

Olivier V. Pictet

Pictet Asset Management ( email )

Geneva
Switzerland

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