Submergence = Drawdown Plus Recovery

45 Pages Posted: 3 Feb 2023 Last revised: 13 Apr 2023

See all articles by Dane Rook

Dane Rook

Stanford University

Dan Golosovker

Addepar

Ashby Monk

Stanford University

Date Written: February 3, 2023

Abstract

Drawdowns and recoveries are often analyzed separately - yet doing so can leave investors with a distorted view of risk. Indeed, this problem is so commonplace that there’s no consistently-used term for the joint event of a drawdown plus its subsequent recovery. We propose the term ‘submergence’ for such events, and present a new risk metric to help investors analyze them: submergence density. Submergence density overcomes pitfalls of existing metrics, and also allows investors to inject elements of their own risk tolerances, thereby ‘personalizing’ it to their own contexts. Submergence density also offers an alternative method for risk-adjusting returns (with multiple advantages over current methods, such as Sharpe ratios). We use our new risk-adjustment approach to study key markets, and show how it leads to novel diversification strategies. We compare these strategies with other defenses against submergence risk, and conclude that submergence-based diversification is likely the best way for most investors to handle the threat of drawdowns.

Keywords: institutional investment, risk management, drawdowns, recoveries, resilience, risk-adjusted returns

Suggested Citation

Rook, Dane and Golosovker, Dan and Monk, Ashby, Submergence = Drawdown Plus Recovery (February 3, 2023). Available at SSRN: https://ssrn.com/abstract=4346463 or http://dx.doi.org/10.2139/ssrn.4346463

Dane Rook (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

Dan Golosovker

Addepar ( email )

Ashby Monk

Stanford University ( email )

United States

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