Optimal Portfolio Strategy under Rolling Economic Maximum Drawdown Constraints

Abstract EN

This paper deals with the problem of optimal portfolio strategy under the constraints of rolling economic maximum drawdown.

A more practical strategy is developed by using rolling Sharpe ratio in computing the allocation proportion in contrast to existing models.

Besides, another novel strategy named “REDP strategy” is further proposed, which replaces the rolling economic drawdown of the portfolio with the rolling economic drawdown of the risky asset.

The simulation tests prove that REDP strategy can ensure the portfolio to satisfy the drawdown constraint and outperforms other strategies significantly.

An empirical comparison research on the performances of different strategies is carried out by using the 23-year monthly data of SPTR, DJUBS, and 3-month T-bill.

The investment cases of single risky asset and two risky assets are both studied in this paper.

Empirical results indicate that the REDP strategy successfully controls the maximum drawdown within the given limit and performs best in both return and risk.