Abstract
The Sharpe ratio and the maximum drawdown (MDD) are two of the most important tools for risk measurement. Existing literatures have presented analytical results relating them under geometric Brownian motion. In this paper, we take a data-driven approach to derive a relationship between ex-post Sharpe ratio and MDD. We do not assume any specific distribution of the returns except that they be stationary and ergodic. The relationship we derive can serve as a quick sanity check for black-box performance reports if the Sharpe ratios are estimated by the ex-post Sharpe ratio. Some numerical results are given for illustration.
Original language | English |
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Pages (from-to) | 7-19 |
Number of pages | 13 |
Journal | Journal of Performance Measurement |
Volume | 22 |
Issue number | 1 |
Publication status | Published - 2017 |
Externally published | Yes |