Historical drawdown
The stock market tends to rise over time, but that doesn't mean that you won't have periods of drawdown.
Drawdown can be measured as the percentage loss from the highest cumulative historical point.
In Python, you can use the .accumulate()
and .maximum()
functions to calculate the running maximum, and the simple formula below to calculate drawdown:
$$ \text{Drawdown} = \frac{r_t}{RM} - 1$$
- \(r_t\): Cumulative return at time t
- \(RM\): Running maximum
The cumulative returns of USO, an ETF that tracks oil prices, is available in the variable cum_rets
.
This is a part of the course
“Introduction to Portfolio Risk Management in Python”
Exercise instructions
- Calculate the running maximum of the cumulative returns of the USO oil ETF (
cum_rets
) usingnp.maximum.accumulate()
. - Where the running maximum (
running_max
) drops below 1, set the running maximum equal to 1. - Calculate
drawdown
using the simple formula above with thecum_rets
andrunning_max
. - Review the plot.
Hands-on interactive exercise
Have a go at this exercise by completing this sample code.
# Calculate the running maximum
running_max = ____(cum_rets)
# Ensure the value never drops below 1
running_max[____] = 1
# Calculate the percentage drawdown
drawdown = (____)/____ - 1
# Plot the results
drawdown.plot()
plt.show()