INTRODUCTION: Thefactthatfinancialdataisnotindependentandidenticallydistributed(IID)exhibiting extraordinarylevelsofautocorrelationisawellknownandanacceptedfact.Theeffectofthis autocorrelationoninvestmentreturnsdiminishestheapparentriskofsuchassetclassesasthe truereturns/riskiseasilycamouflagedwithinahazeofilliquidity,staleprices,averagedprice quotesandsmoothedreturnreporting. Suchdiscrepanciesleadtomisleadingperformancestatisticssuchasvolatility,Sharperatio, correlation,marketbetaandotherinvestmentindicatorsbasedontheAssumptionsof Normality/IIDofdata.Ouraimistodevelopthedifferentapproachesforaddressing autocorrelationobservedinfinancialdatathathaverecentlybeendiscussedinresearchjournals andincludethefunctionsinPerformanceAnalytics,anRpackagethatprovidesacollectionof econometricfunctionsforperformanceandriskanalysis. CODINGPLAN&METHODS: MainSteps:Iproposetoimplementthefollowinglistofalgorithmsthathaveaddressed theissueofIIDinfinancialtimeseriesdata.

1. CalculateUnsmoothedReturns: OkunevandWhiteModel Methodology:Toremovetheautocorrelationeffectintheseriesthemodeldescribesan iterativeapproachuntilthefirstmautocorrelationsaresufficientlyclosetozero. Ingeneral,toremoveanyorderm,autocorrelationsfromagivenreturnserieswewouldmake thefollowingtransformationtoreturnsseries:

rm,t =

rm1,tcm*rm1,t 1cm

Oncewehavefoundthissolutionfor cm tocreate rm,t ,wewillneedtoiteratebackto removethefirst(m1)autocorrelationsagain.Asmentionedtheprocessisiterateduntilallthe valuesaresufficientlyclosetozero. Implementation:Asthesolution(closedform)for rm,t isdifferentfromtheoneobtainedfrom lme/glsacffunctionsinpackagenlme.Iplantoimplementafunctionwhichwouldrequire checkingoffollowingconditionateverystep:

 andalsorepeatthestepuntiltheautocorrelationaresufficientlyclosetozero. GLMModel:

Methodology:TheGLMmodelrestsonaparticularassumptiononthestructureof reportedreturnswhicharesupposedtobeaweightedaverageofpasttrueunobserved returns.Thisstructureissupposedtobethefollowing:

where r0 t isobservedreturnattimet, rt isthetrueunobservedreturnattimetandeach is interpretedasthesmoothingparameterthatmustbeestimated. Implementation:Theestimatedmethodisbasedonamaximumlikelihoodassumptionofa movingaverageprovess.ItisusesthealgorithmproposedbyBrockwellandDavies(1991).Iplan tousethepackageitsmr,whichprovidesasubsetofthefunctionalityusingthetextbook IntroductiontoTimeSeriesandForecastingbyPeterJ.BrockwellandRichardA.Davis.The functionma.infwouldbeusedforthispurposetocalculatedunsmoothedreturns.

GentlerModel:skipitasitalreadyhasbeenimplemented.

2. ComparativetableforassessingnormalityofdataafterGLMandOWmodelhave beenimplementedonthetimeseries: Smoothinghasanimpactonthethirdandfourthmomentsofthereturnsdistribution too.Skewnessisameasureofsymmetry,ormoreprecisely,thelackofsymmetrywhereas, Kurtosisisameasureofwhetherthedataarepeakedorflatrelativetoanormaldistribution.The trueskewness/kurtosismaybecomputedfromtheobservedoneusingtheformula:

 Thesameprinciplecanbeappliedtothekurtosis:

0 Where: X t = r0 t r (mean)

asaconsequencetheequationcanbewrittenasforMA(k):

Implementation:IplantousethemomentspackageinR,wherefunctionssuchasskewness, kurtosiswouldbeusedtoprintatableforcomparativemeasurebetweensmoothedand unsmoothedreturn. 3.Calculatenormalizeddrawdownforgivenvolatilityandtrackrecordlength Methodology:Theanalysisofpapershowsthatthethreemostimportantdeterminantsof drawdownsareI)lengthoftrackrecord,II)meanreturnandIII)volatilityofreturns.Accordingto thepaper,thesimulateddrawdowndistributionsexplainingthedrawdownpatternsthatCTAs( commoditytradingadvisers)haveexhibitedoverthepast10years. Implementation:Thedrawdownsobtainedinthepaperaretheresultofaddingtogether sequencesofreturns.Asaresult,eventhoughthedistributionfromwhichanygivenreturnis drawnmaybehighlyskewed/exhibitfattails,theresultofaddingreturnstogetherproducesa randomvariablethattendstobemorenormallydistributed.

Hence,duetothenormalityofdrawdowns,Iplantogeneratemontecarlosimulationof drawdown(n=1000,asgiveninpaper)usingrmaxddfunction,offbasicspackagewhichtakes astheinputmean,standarddeviationandtracklengthofthedistributiontogeneratearandom drawdown.Thescenarioofdeleveragelimit(whichsomemanagerswouldincaseof drawdown,wouldbeinputtedbytheuser)andconditioneduponinthesimulationprocess.. 4.CalculateexpectedmaximumdrawdownunderBrownianmotionassumptions Theory:Themaximumdrawdownisacommonlyusedinfinanceasameasureofriskfora stockthatfollowsaparticularrandomprocess. UnderStochasticframework,themaximumdrawdownisdefinedas:

D TheDistributionfunctionfor D isdefinedbytheprobabilitydensityfunction(pdf) G( h) =P[ D h].

Thepaperdefinesthepdfas:

where:

n satisfiestheaboveequation.
D 2 Usingtheidentity,E[ D ]= G( h) .dhanddefining = * T /2 0

Implementation:Thepapercontinuestodescribetheclosedformsolution,whoseproofis beyondthescopeofthisproposal.Thepaperproposesanumericalsolutiongiventheasymptotic behaviouroftheintegralfunctionwithatable(giveninAppendixB).Thecodesubmittedforthe proposalusesthistablealongwithvariousintegralcondition(dependsonratios(suchas 2/ h),tocomputetheExpectedDrawdown. 5.Calculateexpectedmaximumdrawdownusingmovingblockbootstrap Theory:Continuingfromthepreviousfunction,thepaperdiscussedaapproachwhereitdivides managersintooneofthreegroups:lowvolatility(0%to12.5%),mediumvolatility(12.5%to25%) andhighvolatility(25%to50%). Implementation:Usingthegroupreturnsandgroupvolatilities,threemaximum drawdowndistributionsaresimulated.Then,usingthenumbersofmanagersineachofthe threegroups,weproducedacompositedistributionthatisaweightedaverageofthethree separatedistributions. Iplantoimplementawrapper:whichwouldusethenormalizeddrawdownfunction implementedinfunction4andtakesusersinputfornumberofmanagersineachgroupto generateaweighteddistribution. 6.Calculatetimeunderwater,penance,andclosedformexpectedmaximumdrawdown Theory:Theframeworkdescribedunderresearchpaperprovidesinvestmentmanagement informationtoportfoliomanagers.Thepaperaccommodatesreturnseriesforfirstorder seriallycorrelatedinvestmentoutcomes.Thederivesclosedformsolutionsforthegiventhree parameterswhicharedescribedbelow: MaximumDrawdown: Forsignificancelevel 1/2 ,theassociated Maximumdrawdowncanbedefinedasthemaximumprobabilisticdrawdownorworst drawdownregardlessoftimehorizonhasbeendefinedas:

(1) MaximumTimeUnderWater(TuW)istimeelapseduntiltheoccurrenceofthedrawdown.

(2)

TriplePenanceRule:Aninvestmentmanageratthebottomofhisperformancehastobe preparedforthepossibilityofremainingunderwaterforanadditionaltripleoftheperiodelapsed sincetheprevioushighwatermarkwithinthesameconfidenceinterval. TheTriplePenancerulehoweverassumesIIDcashflowsovertime( t ). Implementation:Snippetsofpythoncodehavebeenprovidedinthepaperfortheanalytical solution. MaximumDrawdown:ThesnippetusesaStandardNormalDistributionforagivensetof confidencelevel,timehorizon,meanandstddeviationtogenerateamontecarlosimulation (1million)withfirstorderautoregressivecoefficient. Iplantousetheqrnorm(n,mean,sd)functioninR,whichreturnsthespecifiedquantileloss undergivenconfidencelevel,togeneraterandomnormaldistributionandacf()functionsin packagenlmetoaccommodateforAR(1)togeneratedrawdownunderconfidencelevel SimilarlyaGoldenSectionAlgorithmhasbeenusedtocomputemaximumdrawdownofthe process.isatechniqueforfindingtheextremum(minimumormaximum)ofastrictlyunimodal functionbysuccessivelynarrowingtherangeofvaluesinsidewhichtheextremumisknownto exist. TimeUnderWater(TuW):Theanalyticalsolutioninthesnippetcodehasbeenimplemented usingtheGoldenSectionAlgorithmunderagivensetofquantilewhereextremeof searches(drawdownquantile,wouldbeprespecifiedbytheuser). TheTriplePenanceRule:ThevalueoftheparameterwouldbeamultiplicationofTuWtothe productof3. 7.AddanautocorrelationadjustmentmethodtoStdDev,skewnessandkurtosis Theory:Infinance,thetranslationofvariancefromdaydaytoweekweek,monthmonthoronan annualbasisisdoneundertheassumptionofIIDasshowninexamplebelow.
= n n * 1

Toaccountforautocorrelation,theformulaproposedis:

where i representstheautocorrelationcoefficientforthe ith lag.

Implementation:Iplantousetheacf()functiontocomputethe ith lagcoefficientsinthe series.Giventheconditionn>kissatisfied,thetranslatedvarianceiscalculated.Theuserwould inputthefrequencyofthedataseriesmatrixandalsothetranslatedversiondesired. 8.AddanACadjusted'Lo'methodtoSharpeRatio ConsiderfirstthecaseofIIDreturns.Denoteby Rt(q) thefollowingqperiodreturn: Rt(q) Rt + Rt1 + ........Rtq+1 TherelationbetweentheLHSwiththesetoflaggingreturnsisdeterminedbythefollowing equation: Var[ Rt(q) ]= C ov(Rti,Rtj) = q * 2 + 2 * 2 * (q k) * k
i=0 j=0 k=1 i1 j1 q1

Where: k = C ov(Rt,Rtk)/V ar(Rt) isthekorderautocorrelationofthetimeseries, AsintheNonIIDReturnsection,wecanuseGMMtoestimatetheseautocorrelationsaswell astheirasymptoticjointdistribution,whichcanthenbeusedtoderivethefollowinglimiting distributionof SR (q):

T * (SR(q) SR(q)) == NormalDistribution(0, V MM (q)) Where: V MM (q) = g/ * * g/

whereasg, and aredefinedunderstochasticframework. Also,theStandardErrorofsharperatioisconstructedwiththeconfidencetimeintervalas: SE( SR(q) )=

MM (q)/T

Implementation:ThedistributiongenerationfortheShapreratiocanbecomputedbyfirstfinding firstkorderautocorrelationsasspecifiedbytheuser,definingofmatricesg, and tooutputa SRestimated(uppertail)underthespecifiedconfidenceinterval.Thestandarderrorofthesharp ratioestimatedcanalsobeobtainedunderthevarianceandconfidencetimeinterval.

9.AddanACadjusted'probabalistic'methodtoSharpeRatio Methodology:Inthispaperanew,practicalapproachtoestimatesharperatioinaprobalistic formatisdetermined.

Implementation:ThecodegeneratesnewSharperatiobasedonmixtureofcorrelatednormal distributionscorrelatedamongthemselves.Iplantoreplicatethepythoncodegiveninthepaper basedontheequationsderivedinpaper.

10.FinishGLM'ssmoothingindex Methodology:TheGLMmodelrestsonaparticularassumptiononthestructureofreported returnswhicharesupposedtobeaweightedaverageofpasttrueunobservedreturns.This structureissupposedtobethefollowing:

where r0 t isobservedreturnattimet, rt isthetrueunobservedreturnattimetandeach is interpretedasthesmoothingparameterthatmustbeestimated. Inthecontextofsmoothedreturns,alowervalueof impliesmoresmoothing,andtheupper boundof1impliesnosmoothing,henceweshallreferto asasmoothingindex Theconcentrationofweightscanbemeasuredas: 2 j

j=0 k

Implementation:ItwouldbeacontinuationoftheGLMfunctionwhichcomputesthextsvectorof various is andcomputethesumofsquaretoarriveatthesmoothingindex 11.Plotofmaximumdrawdowndistribution Methodology:Thecomputationparthasalreadybeenimplementedintheprevioussectionsfor BurghardtandLiu(2012). Implementation:R,Sweave,andLaTeX.wouldbeusedforchartpublication.Inparticular, x t a b l e inthex t a b l e packagewouldbeusedtogenerateacomparativetableforNonACand ACmaximumdrawdowndistribution. 12.PlotexpectedmaxDDversusrealizedmaxDD Implementation:Plotexpectedversusrealizedmaximumdrawdownsfortheoriginal setofdata,butthistimewehaveusedtheirrespectiveautocorrelationestimateswhen calculatingtheexpectedmaximumdrawdownforeachmethodssuchasusingbrownianmotion, normalized,magdonIsmail,BaileyandLopezdePrado(computationportiondiscussedinabove sections)inacompositeplot(ExpectedmaxDDvsrealizedmaxDD)alsocontainingy=xline forcomparativepurpose. 13.StackedbarplotoflagsforAC Implementation:Usageofacf()functionandggplot2andRcolorbrewerpackageforcreationof autocorrelationlagsstackedbarplot(numberdependentonuser) 14.Plotmaximumdrawdown/annualizedvolatilityasafunctionofSR Methodology:Supposethattherateofreturnoftheassetfollowsanormallawwithmeanand standarddeviation,N(,2).Inthatcase,theexpectedmaximumlosscanbecalculated.This isequalto:

where isthecumulativestandardnormal.andNisthenumberofdays.

TheaboveequationshowsMaximumDrawdown/VolatilityasafunctionofReturn/Volatility

Implementation: ProceededtoMonteCarlosimulations(1million/6000carriedbypaperfor36monthstime period)bysimulatingreturnsoveraperiodofdailyreturns(frequencytobeinputtedbyuser)and measuredmaximumdrawdownforvariedlevelsofannualisedreturndividedbyvolatilityvarying from[a,a](specifiedbyuser)bystepof0.01andplottingdataforvariedleveloflowertail quantiles(referredasthresholdpointsinpaper,1%,5%&10%)understandardnormaldistribution .ThefunctionwouldalsoinputxtsreturnseriesbyuserwhoseExpectedMaximumLosswould becalculatedandbenchmarkedagainstthemontecarlosimulatedMaxDD/volvsreturn/volplot forcomparativeinsights. 15.ProvideanalternateversionofConditionalDrawdown TheportfoliosConditionalValueatRisk(CVaR)usingmethodsinComparativeAnalysisof LinearPortfolioRebalancingStrategies:AnApplicationtoHedgeFundsbyKrokhmal,P.,S. Uryasev,andG.Zrazhevskyhasbeenimplementedunderthefunctionmin.cdar.portfolio, whichhasbeenpublishedinrbloggerswebsite. Chekhlov,UryasevandZabarankin(2003)proposealternativeversionofoptimizedcalculationto reducethecomputationtime. Givenatimeseriesofinstrument'sdrawdowns =( 1 ,........, n ),correspondingtotime moments( t1,.......,tn) ,theCDDfunctionalispresentedbyCVAR ( ),whichcomputationis reducedtothefollowinglinearprogrammingprocedure:

leadingtoasingleoptimalvalueofyequalto ( )if ( ( ))> ,andtoaclosedintervalof optimalywiththeleftendpointof ( )if ( ( ))= . Thecomputationalimprovementmentionedhere,transformstheobjectivefunctiontoa knapsackproblem:

Theknapsackproblemisdualtolinearprogrammingproblemmentionedabove.Basedon dualitytheory,optimalvaluesofboththeobjectivefunctionscoincide. Hence,theproblemcanbesolvedbythestandardgreedyalgorithminO(nlog2n)time. IplantoimplementThesubselectpackagewhichprovidesthreefunctionswithdifferentsearch algorithms:annealasimulatedannealingtypesearchalgorithmgeneticageneticalgorithmand improveamodifiedlocalimprovementalgorithm. Theyperformbetterthanthegreedytypealgorithms,suchasthestandardstepwiseselection algorithmswidelyusedinlinearregression. AllfoursearchfunctionsinvokecodewrittenineitherC++(eleaps)orFortran(anneal,genetic andimprove),tospeedupcomputationtimes. 16.CalculateConditionalDrawdownatRisk(CDaR) ThealgorithmdiscretizingtimeintervalintoNpartsandthereturns,whichwouldbeusedto computetheAverage,MaxandConditiondrawdownbasedondifferentconstraintsandobjective function.Theproblemisthensolvedbymaximizingtheobjectfunctionusinglinearprogramming tools. 17.CalculateRollingEconomicDrawdown(REDD) Methodology:Thepaperproposeanalternativetotheanchoredtimewindow(sinceinception)for drawdowncalculation:aconstantrollingtimewindow.DefineaRollingEconomicMax(REM)at timet,lookingbackatportfoliowealthhistory(W)forarollingwindowoflengthH:

FromREM,theRollingEconomicDrawdown(REDD)isconsequentlydefinedas:

 Implementation:Usingthereturntimeseriesandriskfreerate(rf),rollingwindowhorizon(H)as input,generateportfoliowealthasafunctionoftime(Wt).Nextstepwouldcreatealookback window(H)uponmentionedconditionsgenerateaxtsvectorforREDDatalltimeintervals. 18.Writeawrappertoproducestandarderrorestimatesforagivenfunctionin PerformanceAnalytics Implementation:Wrapperwouldsupportvariousmethods:basedonthevarianceoftheinput data,bootstrap,blockbootstraptokeepsomeautocorrelationstructureanddifferentsetsof distributionsfunctions.

19.SupportHCandHACmethodswithinregressionfunctions

Implementation:inthepackagesandwichintheRsystem,HCandHACcovariancesmatrices cannowbeextractedfromthesamefittedmodelsusingvcovHCandvcovHAC.Usethe matricesforassessingpartialtorztest(forregression)forcoefficientsunderfunctionsfor regressionavailableinlmtestpackage.,Testinganddatingstructuralchangesinthepresence ofheteroskedasticityandautocorrelation(OLSbasedCUSUMtestusingquadraticspectral kernelHACestimatorofAndrews(1991)). Timeline Communityperiod: April24thtoMay27. TofamiliarizemyselfwithRfunctionalitiesusefulforproject, Interactionwithmentorabouttheexactrequirements.IwillremainactiveonIRCandMailing Liststodiscussandfinalizethedesignandstructureofnewalgorithmstobeimplemented. ImplementationofOWModel(OkunevandWhite),GLMModel(Getmansky,LoandMakarov)for calculationofunsmoothreturns.Thefunctionscanbetestedondatasetsresearcheduponinthe papaer.

Codingperiod: May27toSept27. week1:AddanACadjusted'Lo'methodtoSharpeRatio,FinishGLM'ssmoothingindex

week2:ImplementBurghardt,DuncanandLiu(2003)normalizeddrawdownmethodand expectedmaximumdrawdownusingmovingblockbootstrap TestingandDebugging week3:ImplementationofBurghardtandLiu(2012)functionsforautocorrelationadjustment, plotofExpectedDrawdownvsMaxDrawdownandstackedgraphplot TestingandDebugging week4:ImplementAcarandJames(1997)functions. week5:Chekhlov,UryasevandZabarankin(2000)conditionaldrawdownimplementation week6:Chekhlov,UryasevandZabarankin(2003)alternativeversions(methods). week7:BaileyandLopezdePrado(2012)ACadjusted'probabilistic'methodtoSharpeRatio

week8:timeunderwater,penance,andclosedformexpectedmaximumdrawdownfunctions BaileyandLopezdePrado(2013) week9:CalculateRollingEconomicDrawdownfunctionasmentionedYangandZhong(2012)

week10:SupportHCandHACmethodswithinregressionfunctionsZeileis(2004) week11:BacktestingHCandHACmethodsonvariousdatasamples.Comparingresultsfrom equivalentmatlabfunctions. week12:Wrapperfunctionforstandarderrorestimates. week13:Creatingexampledatasets,Demos,writingdocumentation.Finalizethepackage, checkingitsreusability,compatibilitywithotherpackages. August26: Submission.

Somefutureproposalsare(tobeimplementediftimepermits,asIwouldbecompletingthe projectearlyduetojoiningdateofmyjob): Researchingaboutfastermethodsofevaluationoftheprograms. UsingRCpptospeeduptheexecutiontime.

MANAGEMENTOFCODINGPROJECT Whatisthecommunicationplanwithmentors? Iwillreporttothemdailyoratleastonceineverytwodaysthroughemails.Willcontactthem throughskypeorgtalkincaseofanyconfusion. Howdoyouproposetoensurecodeissubmitted/tested? Iwilltrymybesttosticktothescheduleandworkeverydayandhaveclosecontactwiththe mentors.Iwillbeusingsubversionfortrackingchangestotheprograms.Withregularworkand sincerity,Ithinkitwillnotbeaproblemformetofinishmywork. Whatisyourcontingencyplanforthingsnotgoingtoschedule? Ifforsomeunforeseenreason,theworkdoesnotgoaccordingtoschedule,Iwilltryto compensateforthetimelostbyworkingforsomeextrahours.Iwillfinishthemostimportant programsfirst,toprovidethebasicfunctionalities,thenmoveontomoresophisticated programs. EDUCATIONALQUALIFICATIONANDPREVIOUSEXPERIENCE: Aboutme: IamaMastersinFinancialEngineeringstudentfromacollaborativeNanyangTechnological UniversityCarnegieMellonUniversityprogram.. Whyisthisprojectimportantforme?: IwishtopursueadoctoraldegreeinAppliedMathematicsafterworkingintheindustryasa financeprofessionalforafewyears..Iwillbestartingmyjobfromfall2012.Ithinkthisprojectwill providemeanexcellentopportunitytolearnthelatestdevelopmentsininvestmentanalytics industryandunderstandingofreturnsfromvariousilliquidinvestmentassetswhosebehaviour divertfromnormality.

Timecommitments: Ihave4subjectstopursueduringmylasttrimesteratCarnegieMellonUniversity.Apartfrom this,Idonothaveanycommitment.Iwillbeabletodevoteatleast30HrsperweekforGsoc.

WhydoIfeeleligibleforthisproject?: As a postgraduate student of Financial Engineering, I have done all the required coursework for this project. I had courses likeRegression,TimeseriesandForecasting, Asset Pricing in my curriculum. AlsoI have workedwith C++,Python and R in all ofmy previous projects and have done lab courses with them. So I feel very comfortable working with them.I believe this experience is quite relevant and valuable to my Gsoc proposal. References:
Acar, E., and Shane, J.: Maximum Loss and Maximum Drawdown in Financial Markets, Unpublished 1997http://www.intelligenthedgefundinvesting.com/pubs/easj.pdf manuscript,

Bailey, David H. and Lopez de Prado, Marcos, The Sharpe Ratio Efficient Frontier (July 1, 2012). Journal of Risk, Vol. 15, No. 2, Winter 2012/13. Available at SSRN: http://ssrn.com/abstract=1821643 or http://dx.doi.org/10.2139/ssrn.1821643

Bailey, David H. and Lopez de Prado, Marcos, Drawdown-Based Stop-Outs and the Triple Penance Rule (January 1, 2013). Available at SSRN:

http://ssrn.com/abstract=2201302

Bailey, David H. and Lopez de Prado, Marcos, The Strategy Approval Decision: A Sharpe Ratio Indifference Curve Approach (January 2013). Algorithmic Finance, Vol. 2, No. 1 (2013). Available at SSRN: http://ssrn.com/abstract=2003638 orhttp://dx.doi.org/10.2139/ssrn.2003638

Burghardt, G., Duncan, R. and L. Liu, Deciphering drawdown. Risk magazine, Risk management for investors, September, S16-S20,

2003.http://www.risk.net/data/risk/pdf/investor/0903_risk.pdf

Kat, Harry M. and Brooks, Chris, The Statistical Properties of Hedge Fund Index

Returns and Their Implications for Investors (October 31, 2001). Cass Business School Research Paper. Available at SSRN: http://ssrn.com/abstract=289299 orhttp://dx.doi.org/10.2139/ssrn.289299

Burghardt, G., and L. Liu, Its the Autocorrelation, Stupid (November 2012) Newedge working paper.http://www.amfmblog.com/assets/Newedge-Autocorrelation.pdf Cavenaile, Laurent, Coen, Alain and Hubner, Georges, The Impact of Illiquidity and Higher Moments of Hedge Fund Returns on Their Risk-Adjusted Performance and Diversification Potential (October 30, 2009). Journal of Alternative Investments, Forthcoming. Available at SSRN:http://ssrn.com/abstract=1502698 Working paper is athttp://www.hec.ulg.ac.be/sites/default/files/workingpapers/WP_HECULg_20091001_ Cavenaile_Coen_Hubner.pdf

Chekhlov, Alexei, Uryasev, Stanislav P. and Zabarankin, Michael, Portfolio Optimization with Drawdown Constraints (April 8, 2000). Research Report #2000-5. Available at SSRN: http://ssrn.com/abstract=223323 or http://dx.doi.org/10.2139/ssrn.223323

Chekhlov, Alexei, Uryasev, Stanislav P. and Zabarankin, Michael, Drawdown Measure in Portfolio Optimization (June 25, 2003). Available at SSRN:

http://ssrn.com/abstract=544742 or http://dx.doi.org/10.2139/ssrn.544742

Getmansky, Mila, Lo, Andrew W. and Makarov, Igor, An Econometric Model of Serial Correlation and Illiquidity in Hedge Fund Returns (March 1, 2003). MIT Sloan Working Paper No. 4288-03; MIT Laboratory for Financial Engineering Working Paper No. LFE-1041A-03; EFMA 2003 Helsinki Meetings. Available at SSRN: http://ssrn.com/abstract=384700 or http://dx.doi.org/10.2139/ssrn.384700

Grossman, S. and Z. Zhou (1993): Optimal Investment Strategies for controlling drawdowns. Mathematical Finance, Vol. 3, pp.

241-276.http://www.intelligenthedgefundinvesting.com/pubs/rb-zzsg.pdf

Harding D, G Nakou and A Nejjar, 2003. The pros and cons of drawdown as a statistical measure for risk in investments. AIMA Journal, April 2003, pages 1617. http://www.intelligenthedgefundinvesting.com/pubs/rb-hnn.pdf paper:http://www.turtletrader.com/drawdown.pdf or as working

Hayes, Brian T.: Maximum Drawdowns of Hedge Funds with Serial Correlation, Journal of Alternative Investments 8, pp. 26-38, 2006 (N/A online?) Lo, Andrew W., The Statistics of Sharpe Ratios. Financial Analysts Journal, Vol. 58, No. 4, July/August 2002. Available at SSRN:http://ssrn.com/abstract=377260 Lopez de Prado, Marcos and Foreman, Matthew, Markowitz meets Darwin: Portfolio Oversight and Evolutionary Divergence (July 15, 2012). Johnson School Research

Paper Series No. 39-2011. Available at SSRN: http://ssrn.com/abstract=1931734 orhttp://dx.doi.org/10.2139/ssrn.1931734

Lopez de Prado, Marcos and Peijan, Achim, Measuring Loss Potential of Hedge Fund Strategies. Journal of Alternative Investments, Vol. 7, No. 1, pp. 7-31, Summer 2004. Available at SSRN: http://ssrn.com/abstract=641702

Magdon-Ismail, M. and Amir Atiya, Maximum drawdown. Risk Magazine, 01 Oct 2004.http://www.risk.net/data/Pay_per_view/risk/technical/2004/1004_tech_atiya.pd f or http://alumnus.caltech.edu/~amir/mdd-risk.pdf. Matlab code at http://www.mathworks.com/help/finance/emaxdrawdown.html

Magdon-Ismail, M., Atiya, A., Pratap, A., and Yaser S. Abu-Mostafa: On the Maximum Drawdown of a Browninan Motion, Journal of Applied Probability 41, pp. 147-161, 2004 http://alumnus.caltech.edu/~amir/drawdown-jrnl.pdf

Mendes, Beatriz V.M. and Leal, Ricardo P.C., Maximum Drawdown: Models and Applications (November 2003). Coppead Working Paper Series No. 359. Available at SSRN: http://ssrn.com/abstract=477322 or http://dx.doi.org/10.2139/ssrn.477322

Meucci, Attilio, Review of Dynamic Allocation Strategies: Utility Maximization, Option Replication, Insurance, Drawdown Control, Convex/Concave Management (July 7, 2010). Available at SSRN: http://ssrn.com/abstract=1635982 orhttp://dx.doi.org/10.2139/ssrn.1635982

Okunev, John and White, Derek R., Hedge Fund Risk Factors and Value at Risk of Credit Trading Strategies (October 2003). Available at SSRN:

http://ssrn.com/abstract=460641 or http://dx.doi.org/10.2139/ssrn.460641

Skeggs, J. Do the autocorrelations hold with daily and weekly data? (November 2012) Newedge working

paper.http://www.newedge.com/content/dam/newedgecom/documents/brokerage-ser vices/alternativeedge-snapshots/Newedge_Snapshot_Do_the_autocorrelations_hold_w ith_daily_data.pdf

Yang, Z. George and Zhong, Liang, Optimal Portfolio Strategy to Control Maximum Drawdown - The Case of Risk Based Dynamic Asset Allocation (February 25, 2012). Available at SSRN: http://ssrn.com/abstract=2053854 or http://dx.doi.org/10.2139/ssrn.2053854

Zabarankin, M., Pavlikov, K., and S. Uryasev. Capital Asset Pricing Model (CAPM) with Drawdown Measure. Research Report 2012-9, ISE Dept., University of Florida, September 2012

CodeforCalculatingExpectedMaximumDrawdownunderBrownianMotion: Refrence:MagdonIsmail,et.al.(2003and2004) #functionemaxdrawdowncalculatestheExpectedValueE[D] #ofthemaximumdrawdownofbrownianMotionforagiven #drift(mu),standarddeviation(sig),andTimeHorizon(T) #oftheBrownianMotion #mu:driftofthebrownianmotion #sig:Varianceofthebrownianmotion #T:Timehorizonofthebrownianmotion

emaxdrawdown<function(mu,sig,T){ gamma<sqrt(pi/8) if(mu==0){ Ed<2*gamma*sig*sqrt(T) } else{ alpha<mu*sqrt(T/(2*sig^2)) x<alpha^2 if(mu>0){ mQp<matrix(c( 0.0005,0.0010,0.0015,0.0020,0.0025,0.0050,0.0075,0.0100,0.0125, 0.0150,0.0175,0.0200,0.0225,0.0250,0.0275,0.0300,0.0325,0.0350, 0.0375,0.0400,0.0425,0.0450,0.0500,0.0600,0.0700,0.0800,0.0900, 0.1000,0.2000,0.3000,0.4000,0.5000,1.5000,2.5000,3.5000,4.5000, 10,20,30,40,50,150,250,350,450,1000,2000,3000,4000,5000,0.019690, 0.027694,0.033789,0.038896,0.043372,0.060721,0.073808,0.084693,0.094171, 0.102651,0.110375,0.117503,0.124142,0.130374,0.136259,0.141842,0.147162, 0.152249,0.157127,0.161817,0.166337,0.170702,0.179015,0.194248,0.207999, 0.220581,0.232212,0.243050,0.325071,0.382016,0.426452,0.463159,0.668992, 0.775976,0.849298,0.905305,1.088998,1.253794,1.351794,1.421860,1.476457, 1.747485,1.874323,1.958037,2.020630,2.219765,2.392826,2.494109,2.565985, 2.621743),ncol=2) if(x<0.0005){ Qp<gamma*sqrt(2*x) } if(x>0.0005&x<5000){ Qp<spline(log(mQp[,1]),mQp[,2],n=1,xmin=log(x),xmax=log(x))$y

} if(x>5000){ Qp<0.25*log(x)+0.49088 } Ed<(2*sig^2/mu)*Qp } if(mu<0){ mQn<matrix(c( 0.0005,0.0010,0.0015,0.0020,0.0025,0.0050,0.0075,0.0100,0.0125,0.0150, 0.0175,0.0200,0.0225,0.0250,0.0275,0.0300,0.0325,0.0350,0.0375,0.0400, 0.0425,0.0450,0.0475,0.0500,0.0550,0.0600,0.0650,0.0700,0.0750,0.0800, 0.0850,0.0900,0.0950,0.1000,0.1500,0.2000,0.2500,0.3000,0.3500,0.4000, 0.5000,1.0000,1.5000,2.0000,2.5000,3.0000,3.5000,4.0000,4.5000,5.0000, 0.019965,0.028394,0.034874,0.040369,0.045256,0.064633,0.079746,0.092708, 0.104259,0.114814,0.124608,0.133772,0.142429,0.150739,0.158565,0.166229, 0.173756,0.180793,0.187739,0.194489,0.201094,0.207572,0.213877,0.220056, 0.231797,0.243374,0.254585,0.265472,0.276070,0.286406,0.296507,0.306393, 0.316066,0.325586,0.413136,0.491599,0.564333,0.633007,0.698849,0.762455, 0.884593,1.445520,1.970740,2.483960,2.990940,3.492520,3.995190,4.492380, 4.990430,5.498820),ncol=2)

if(x<0.0005){ Qn<gamma*sqrt(2*x) } if(x>0.0005&x<5000){ Qn<spline(mQn[,1],mQn[,2],n=1,xmin=x,xmax=x)$y } if(x>5000){ Qn<x+0.50 } Ed<(2*sig^2/mu)*(Qn) } } return(Ed) }