Conditional Drawdown Exploration

May 31, 2012

(This article was first published on Timely Portfolio, and kindly contributed to R-bloggers)

After reading Strub, Issam S., Trade Sizing Techniques for Drawdown and Tail Risk Control (May 21, 2012), I thought I should try to tie this with 2 other good R pieces on Conditional Drawdown:

http://systematicinvestor.wordpress.com/2011/11/01/minimizing-downside-risk/
http://www.rinfinance.com/agenda/2010/Carl+Peterson+Boudt_Tutorial.pdf

As always, NONE OF THIS IS INVESTMENT ADVICE.

In Strub’s paper, he uses conditional drawdown (cdar) and conditional var (cvar) to calculate the position size on directional (breakout determined) long/short currency positions. The results were interesting enough to attempt to replicate with slight changes. For this post, I will use cdar to determine the position size on a long-only Mebane Faber 10-month moving average strategy. We will start with an efficient frontier comparison and then abandon the frontier for a systematic approach.