corrections vs drawdowns - R-SIG-Finance

Tue, Jan 8, 2019 1:48 PM #

Brian,

Thanks again. It would be great if you implement findCorrections(). I think it becomes a popular topic... ?

On top of my head, the default version needs just one parameter, ie. if we're looking for corrections of 10%, let's check them after every peak of 10% since the last correction's trough. But of course there may be a more generic setup.

Alec

From: Brian G. Peterson <brian at braverock.com>
Sent: Tuesday, January 8, 2019 11:55 AM
To: Alec Schmidt; r-sig-finance at r-project.org
Subject: Re: [R-SIG-Finance] corrections vs drawdowns

I think that this is correct.  NASDAQ was still in a drawdown.  NASDAQ
didn't make new all-time highs until 2014.

Some people define 'corrections' as drawdown from most recent peak.
Charles Schwab's definition is in-line with generally accepted usage:

https://na01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.schwab.com%2Fresource-center%2Finsights%2Fcontent%2Fmarket-correcti&amp;data=02%7C01%7Caschmid1%40stevens.edu%7C104e1f582d6242bfce0208d6758a227a%7C8d1a69ec03b54345ae21dad112f5fb4f%7C0%7C0%7C636825633496698033&amp;sdata=rkHsOOY4EdLB9LUu4bomU4%2F98T3kHidzSJY%2BGEQ4NsI%3D&amp;reserved=0
on-what-does-it-mean

The Motley Fool uses a similar but not identical definition:

https://na01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.schwab.com%2Fresource-center%2Finsights%2Fcontent%2Fmarket-correcti&amp;data=02%7C01%7Caschmid1%40stevens.edu%7C104e1f582d6242bfce0208d6758a227a%7C8d1a69ec03b54345ae21dad112f5fb4f%7C0%7C0%7C636825633496698033&amp;sdata=rkHsOOY4EdLB9LUu4bomU4%2F98T3kHidzSJY%2BGEQ4NsI%3D&amp;reserved=0
on-what-does-it-mean

quantmod has a 'findPeaks' function, but this is dependent on you
setting a threshold for what defines a peak.

A related Stack Overflow question may provide something in the
direction of what you're looking for to look at drawdown from a recent
peak.

https://na01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fstackoverflow.com%2Fquestions%2F14737899%2Fcalculate-cumulatve-growth&amp;data=02%7C01%7Caschmid1%40stevens.edu%7C104e1f582d6242bfce0208d6758a227a%7C8d1a69ec03b54345ae21dad112f5fb4f%7C0%7C0%7C636825633496708038&amp;sdata=R9gkq2ILuqhdJQpjyijXw%2Flmogrxto8WP%2BvV05K6lgo%3D&amp;reserved=0
-drawdown-from-local-min-max

I would certainly be happy to include a 'findCorrections' function in a
later version of PerformanceAnalytics if we could parameterize what
constitutes a 'recent high' for that purpose.

Regards,

Brian


On Tue, 2019-01-08 at 16:36 +0000, Alec Schmidt wrote:
> Thank you Brian,
> geometric=FALSE gave me additional corrections in 2011 and 2012 but
> still no bear market of 2008:
>
>
>  08/30/2018 - 12/24/2018 (-11.04%) [80 Days]
> 07/21/2015 - 02/11/2016 (-10.05%) [143 Days]
> 09/17/2012 - 11/15/2012 (-8.42%) [42 Days]
> 03/27/2012 - 06/01/2012 (-9.44%) [47 Days]
> 07/08/2011 - 08/19/2011 (-15.96%) [31 Days]
> 05/02/2011 - 06/17/2011 (-7.59%) [34 Days]
> 02/22/2011 - 03/16/2011 (-6.54%) [17 Days]
> 07/18/2000 - 10/09/2002 (-97.34%) [559 Days]
> Alec
>
>
>
> From: Brian G. Peterson <brian at braverock.com>
> Sent: Tuesday, January 8, 2019 11:17 AM
> To: Alec Schmidt; r-sig-finance at r-project.org
> Subject: Re: [R-SIG-Finance] corrections vs drawdowns
>
> Alec,
>
> I suspect that you may wish to start with setting geometric=FALSE in
> your call to findDrawdowns.
>
> Corrections are usually defined as a peak to trough difference in
> *price*, as a percentage of the peak price.
>
> So I think you do not want to compound the *returns* in calculating
> your drawdowns.
>
> Regards,
>
> Brian
>
>
> On Tue, 2019-01-08 at 16:09 +0000, Alec Schmidt wrote:
> > I tried to use the function findDrawdowns() to compile NASDAQ
> > (^IXIC)
> > corrections. For the sample starting on
> >
> > 2007-01-01, I get the following start -to-trough periods with
> > drawdowns higher than 10%
> >
> > 08/30/2018 - 12/24/2018 (-23.64%) [80 Days]
> > 07/21/2015 - 02/11/2016 (-18.24%) [143 Days]
> > 09/17/2012 - 11/15/2012 (-10.90%) [42 Days]
> > 03/27/2012 - 06/01/2012 (-12.01%) [47 Days]
> > 05/02/2011 - 10/03/2011 (-18.71%) [108 Days]
> > 11/01/2007 - 03/09/2009 (-55.63%) [339 Days]
> >
> >
> > However, if the sample starts on 2000-06-01, I get
> > 08/30/2018 - 12/24/2018 (-23.64%) [80 Days]
> > 07/21/2015 - 02/11/2016 (-18.24%) [143 Days]
> > 07/18/2000 - 10/09/2002 (-73.94%) [559 Days]
> >
> > i.e. no bear market of 2008...
> >
> > This is because ^IXIC didn't recover in 2007 from its fall from top
> > in 2000. This implies that various reports on market corrections do
> > not use the max drawdown. Is there consensus (and possibly R
> > scripts)
> > that address this problem?
> >
> > Thanks! Alec