I’ve been thinking a lot about drawdowns recently. In fact, I was thinking so hard about them I wrote a paper with Jack Vogel on the subject!
We propose the use of maximum drawdown, the maximum peak to trough loss across a time series of compounded returns, as a simple method to capture an element of risk unnoticed by linear factor models: tail risk. Unlike other tail-risk metrics, maximum drawdown is intuitive and easy-to-calculate. We look at maximum drawdowns to assess tail risks associated with market neutral strategies identified in the academic literature. Our evidence suggests that academic anomalies are not anomalous: all strategies endure large drawdowns at some point in the time series. Many of these losses would trigger margin calls and investor withdrawals, forcing an investor to liquidate.
We put together a video describing maximum drawdowns, their importance in risk analysis, and how to calculate maximum drawdowns in excel via a VBA module we are sharing with the world.
Here is a link to the excel spreadsheet:
Here is the source code for the MaxDD function:
Function drawdown(port_series As Range)
Application.EnableCancelKey = xlDisabled
‘ Find the biggest cumulative drawdown for a performance series
‘ dates = dates typically alongside the returns
‘ port_series = port_series returns in % * 100 format
Dim counter As Integer
Dim cume As Double
Dim max As Double
counter = 1
cume = 1
max = 1
For counter = 1 To port_series.Count
If port_series(counter).Value <> “–” Then
cume = (cume * (port_series(counter).Value + 1))
If cume >= 1 Then
cume = 1
If cume < max Then
max = cume
‘If there never was a drawdown
If max = 1 Then
drawdown = “N/A”
drawdown = (max – 1)
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