Conditional Drawdown

Overview

conditional-drawdown is a Python library designed for advanced drawdown risk analysis, with a focus on the Conditional Expected Drawdown (CED) metric. Unlike traditional risk metrics like volatility or Value-at-Risk, CED accounts for the path dependency of drawdowns and provides a robust measure of extreme risk. This tool is ideal for portfolio managers, risk analysts, and quantitative researchers.

Key features include:

• Maximum Drawdown (MDD): Calculates the largest cumulative loss from peak to trough over a given time period.
• Rolling Maximum Drawdown (RMD): Computes drawdowns over sliding windows to track evolving risks.
• Conditional Expected Drawdown (CED): Estimates the expected maximum drawdown given that a threshold is breached, enabling deeper insights into tail risk.
• Portfolio Risk Attribution:(WIP) Analyze and attribute risk contributions across assets or factors using CED.

Installation

You can install the library via pip:

pip install conditional-drawdown

Usage

from conditional_drawdown import CED, max_drawdown, rolling_max_drawdown
import yfinance as yf

# Download historical data
tickers = ["ES=F", "GLD"]
data = yf.download(tickers, end="2023-12-31")["Adj Close"]

# Calculate returns
returns = data.pct_change().dropna()

# Compute Conditional Expected Drawdown (CED)
es_ced = CED(returns['ES=F'].values)
gld_ced = CED(returns['GLD'].values)

print(f"S&P Futures CED: {es_ced}")
print(f"Gold ETF CED: {gld_ced}")

# Portfolio example
portfolio_returns = (returns * 0.5).sum(axis=1)
portfolio_ced = CED(portfolio_returns.values)
print(f"Portfolio CED: {portfolio_ced}")

Features

• Maximum Drawdown (MDD): Calculates the largest cumulative loss from peak to trough in a return series. Example:

    max_dd = max_drawdown(returns['ES=F'].values)
    print(f"Max Drawdown: {max_dd}")

• Rolling Maximum Drawdown (RMD):

Computes MDD over rolling windows, enabling time-sensitive risk tracking. Example:

    rmd = rolling_max_drawdown(returns['GLD'].values, window=21)
    print(f"Rolling Max Drawdown: {rmd}")

• Conditional Expected Drawdown (CED):

Focuses on the tail-end of drawdown distributions, providing a measure of extreme risk exposure. Example:

        ced = CED(returns['GLD'].values, t=21, alpha=0.9)
        print(f"Conditional Expected Drawdown: {ced}")

Why CED?

• Path Dependency: CED captures consecutive losses, unlike volatility or Value-at-Risk.
• Convex and Linear: Useful for portfolio optimization and risk attribution.
• Tail Risk Sensitivity: Ideal for stress-testing portfolios under extreme market conditions.

Contributing

Contributions are welcome! Please follow these steps:

• Fork the repository.
• Create a feature branch: git checkout -b feat/feature-name
• Commit your changes: git commit -m 'Add new feature'
• Push to your branch: git push origin feature-name
• Open a pull request.

License

This project is licensed under the MIT License - see the LICENSE file for details.

Acknowledgements

Inspired by the work of Lisa R. Goldberg and Ola Mahmoud, Drawdown: From Practice to Theory and Back Again. arXiv:1404.7493