On Magnitude, Asymptotics and Duration of Drawdowns for Levy Models
Bernoulli Volume 23, Number 1 (2017), 432-458, Forthcoming
24 Pages Posted: 29 Jun 2015 Last revised: 27 Oct 2016
Date Written: June 28, 2015
This paper considers magnitude, asymptotics and duration of drawdowns for some Levy processes. First, we revisit some existing results on the magnitude of drawdowns for spectrally negative Levy processes using an approximation approach. For any spectrally negative Levy process whose scale functions are well-behaved at 0 , we then study the asymptotics of drawdown quantities when the threshold of drawdown magnitude approaches zero. We also show that such asymptotics is robust to perturbations of additional positive compound Poisson jumps. Finally, thanks to the asymptotic results and some recent works on the running maximum of Levy processes, we derive the law of duration of drawdowns for a large class of Levy processes (with a general spectrally negative part plus a positive compound Poisson structure). The duration of drawdowns is also known as the "Time to Recover" (TTR) the historical maximum, which is a widely used performance measure in the fund management industry. We find that the law of duration of drawdowns qualitatively depends on the path type of the spectrally negative component of the underlying Levy process.
Keywords: Asymptotics, Drawdown, Duration, Levy process, Magnitude, Parisian stopping time
JEL Classification: C69
Suggested Citation: Suggested Citation