piRSquared - 1 year ago 368

Python Question

Maximum Drawdown is a common risk metric used in quantitative finance to assess the largest negative return that has been experienced.

Recently, I became impatient with the time to calculate max drawdown using my looped approach.

`def max_dd_loop(returns):`

"""returns is assumed to be a pandas series"""

max_so_far = None

start, end = None, None

r = returns.add(1).cumprod()

for r_start in r.index:

for r_end in r.index:

if r_start < r_end:

current = r.ix[r_end] / r.ix[r_start] - 1

if (max_so_far is None) or (current < max_so_far):

max_so_far = current

start, end = r_start, r_end

return max_so_far, start, end

I'm familiar with the common perception that a vectorized solution would be better.

The questions are:

- can I vectorize this problem?
- What does this solution look like?
- How beneficial is it?

I modified Alexander's answer into the following function:

`def max_dd(returns):`

"""Assumes returns is a pandas Series"""

r = returns.add(1).cumprod()

dd = r.div(r.cummax()).sub(1)

mdd = dd.min()

end = dd.argmin()

start = r.loc[:end].argmax()

return mdd, start, end

Answer

`df_returns`

is assumed to be a dataframe of returns, where each column is a seperate strategy/manager/security, and each row is a new date (e.g. monthly or daily).

```
cum_returns = (1 + df_returns).cumprod()
drawdown = 1 - cum_returns.div(cum_returns.cummax())
```