Journal of Risk

Modeling drawdowns and drawups in financial markets

Beatriz Vaz de Melo Mendes, Vinicius Ratton Brandi


Periods of turbulence are often characterized by observed consecutive drops in prices, called “drawdowns”. In such cases, static, one-period measures of risk insufficiently describe downside risk. In this paper, we assess risk by formally modeling these random strings of negative returns. We use long-tailed distributions from extreme value theory to model the severity and duration of the drawdowns. This leads to the concept of drawdown-at-risk (DAR) and conditional DAR. The proposed distributions adjust properly to extreme values previously found to be outliers. The paper illustrates the importance of these concepts with stock market indices.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to View our subscription options

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here