Submergence = Drawdown Plus Recovery
Dane Rook (Stanford University), et al.
February 2023
Drawdowns and recoveries are often analyzed separately – yet doing so can leave investors with a distorted view of risk. Indeed, this problem is so commonplace that there’s no consistently-used term for the joint event of a drawdown plus its subsequent recovery. We propose the term ‘submergence’ for such events, and present a new risk metric to help investors analyze them: submergence density. Submergence density overcomes pitfalls of existing metrics, and also allows investors to inject elements of their own risk tolerances, thereby ‘personalizing’ it to their own contexts. Submergence density also offers an alternative method for risk-adjusting returns (with multiple advantages over current methods, such as Sharpe ratios). We use our new risk-adjustment approach to study key markets, and show how it leads to novel diversification strategies. We compare these strategies with other defenses against submergence risk, and conclude that submergence-based diversification is likely the best way for most investors to handle the threat of drawdowns.
Daily Archives: February 17, 2023
Macro Briefing: 17 February 2023
* Pentagon’s top China official is visiting Taiwan
* US mortgage rates rise for second week–average 30-year fixed at 6.32%
* Consumer sector in US showing new signs of resilience
* Will optimism in financial markets strengthen Fed’s hawkish monetary bias?
* US wholesale prices re-accelerate in January–new warning sign for inflation
* Philly Fed Manufacturing Index falls sharply in February
* US housing starts fall in January–lowest level since pandemic was raging in 2020:
