Maximum draw-down and directional trading

Maximum draw-down measures the worst drop in a market in a given time period. Jan Vecer shows how to price and replicate this event. Replication can be naturally linked to existing popular trading strategies, such as momentum or contrarian trading

In this article, introduce new techniques to control the maximum draw-down (MDD). One can view MDD as a contingent claim, and price and hedge it accordingly as a derivatives contract. Trading draw-down contracts or replicating them by hedging would directly address the concerns of portfolio managers who would like to insure against market drops. Similar contracts can be written on the maximum draw-up (MDU). We show that buying a contract on the MDD or MDU is equivalent to adopting a momentum

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What gold's rise means for rates, equities

It has been several years since we have seen volatility in gold. An increase in gold volatility can typically be associated with a change in sentiment and investor behavior. The precious metal has surged this year on increased demand for safe haven…

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