Drawdown Risk in Mutual Funds’ Performance” - Journal of Finance and Investment Analysis

Journal Article

Kumaran, Dr Sunitha . 2013

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Drawdown Risk in Mutual Funds’ Performance

Sunitha Kumaran

 
Abstract
1
To many people, the terror of falling share prices is often significant, often more so than the
pleasure of gains. Accordingly, investors often want to minimize downside volatility as a
part of their portfolio planning. Investors already have several tools to measure downside
volatility, including the lower partial moment and the maximum drawdown. The
performance benchmarks use the lower partial moment as a risk measure. The lower partial
moment, however, doesn’t entirely describe the panic of investors facing continuously
falling stock prices, and the maximum drawdown only captures a single event. A different
tool is needed. Developed by Peter Martin in 1987, the Ulcer Index measures the human
stress of holding a stock. Ulcer Index is a volatility measure that only captures continuous
downside movements in share price, and ignores upside volatility. The more continuous
and prolonged the drawdown, the higher the index and the more likely investing in it will
cause ulcers or sleepless nights.

JEL classification numbers: G110
Keywords: Ulcer Index, Ulcer Performance Index, Volatility, Share price drawdown,
Investor Stress