A1370
Title: Start-to-low drawdown as a risk measure and its application to levered investor portfolio optimization
Authors: Philipp Staehli - University of Basel (Switzerland) [presenting]
Dietmar Maringer - University of Basel (Switzerland)
Abstract: Drawdown is an important risk measure in theory and practice. Most drawdown measures use the running peak as the reference point from which to calculate the drawdown. In the first part, the start-to-low drawdown (SLD), referencing the period start instead, is proposed as a relevant measure for levered investors. The characteristics of the SLD are compared with other popular risk measures. In the second part, an application to a levered investor who is additionally subject to regulatory capital requirements as known in the banking or insurance industry is proposed. Such an investor is subject to regulatory sanctions as soon as their own funds no longer cover capital requirements, i.e. even before equity is exhausted. A portfolio optimization objective is developed that considers return, cost of capital and cost of drawdown together: the solvency cost-adjusted return including the cost of drawdown (SCARD). The empirical analysis employs the European insurance industry as an example. The Solvency II standard model is used to calculate capital requirements, and the model of life and non-life insurance companies is constructed from EIOPA market overview data. The characteristics and performance of SCARD-optimal portfolios of the model companies are compared with those following objectives that do not take drawdown into account.
