Capital Asset Pricing Model (CAPM) with drawdown measure

Michael Zabarankin, Konstantin Pavlikov, Stan Uryasev

Research output: Contribution to journalArticlepeer-review

44 Scopus citations

Abstract

The notion of drawdown is central to active portfolio management. Conditional Drawdown-at-Risk (CDaR) is defined as the average of a specified percentage of the largest drawdowns over an investment horizon and includes maximum and average drawdowns as particular cases. The necessary optimality conditions for a portfolio optimization problem with CDaR yield the capital asset pricing model (CAPM) stated in both single and multiple sample-path settings. The drawdown beta in the CAPM has a simple interpretation and is evaluated for hedge fund indices from the HFRX database in the single sample-path setting. Drawdown alpha is introduced similarly to the alpha in the classical CAPM and is evaluated for the same hedge fund indices. Both drawdown beta and drawdown alpha are used to prioritize hedge fund strategies and to identify instruments for hedging against market drawdowns.

Original languageEnglish
Pages (from-to)508-517
Number of pages10
JournalEuropean Journal of Operational Research
Volume234
Issue number2
DOIs
StatePublished - 16 Apr 2014

Keywords

  • Asset beta
  • Capital asset pricing model (CAPM)
  • Conditional drawdown-at-risk (CDaR)
  • Drawdown
  • Portfolio theory

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