Journal of Computational Finance
ISSN:
1460-1559 (print)
1755-2850 (online)
Editor-in-chief: Christoph Reisinger
PDE methods for maximum drawdown
Libor Pospisil, Jan Vecer
Abstract
ABSTRACT
Maximum drawdown is a risk measure that plays an important role in portfolio management. In this paper, we address the question of computing the expected value of the maximum drawdown using a partial differential equation approach. First, we derive a two-dimensional convection diffusion pricing equation for the maximum drawdown in the Black–Scholes framework. Due to the properties of the maximum drawdown, this equation has a non-standard boundary condition. We apply an alternating direction implicit method to solve the equation numerically. We also discuss stability and convergence of the numerical method.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
