NxMDD - Calculates the Maximum Drawdown

Returns the maximum drawdown (MDD) in the given time series data set.

Syntax

NxMDD(X)

X

is the portfolio simple rate of returns data series (a one-dimensional array of cells (e.g., rows or columns)).

Remarks

1. The drawdown is the measure of the cumulative decline of value from a peak point to the next low point.
2. The MDD is a measure capturing the maximum movement (loss) from a high point to a low point of a portfolio before a new peak is achieved.
3. If all values in the input data set (X) are non-negative (i.e., the portfolio never lost a penny), then the maximum drawdown is zero (0).
4. The MDD is an indicator of downside risk over a specified time period.
5. The MDD is an indicator used to assess the relative riskiness of one investment fund or strategy versus another.
6. By definition, all values in the input data set (i.e., X) must be greater than -1.0.
7. The input data series may include missing values (e.g., #N/A, #VALUE!, #NUM!, empty cell) at either end.
8. The MDD is computed as follows:
   
   $$\textrm{MDD}= \max_{\forall p} \left (\frac{V_p - V_L}{V_p} \right )$$
   $$\textrm{MDD}=1 - \min_{\forall p} \left (\prod_{t_p}^{t_g}{(1+r_i)}\right )$$
   Where:
   
   • $V_p$ is a portfolio's inner peak value.
   • $V_g$ is the succeeding low (trough) portfolio value before a new peak is attained.
   • $t_p$ is an inner high data point (from its neighbors).
   • $t_g$ is an inner low data point, after $t_p$ and immediately before the given portfolio attains a new high value.
   • $r_i$ is the simple rate of return for the i-th data point.

Examples

Example 1:

Related Links

• Wikipedia - Drawdown (economics)
• Investopedia - Maximum Drawdown (MDD)

References

• Hamilton, J .D.; Time Series Analysis, Princeton University Press (1994), ISBN 0-691-04289-6
• Tsay, Ruey S.; Analysis of Financial Time Series John Wiley & SONS. (2005), ISBN 0-471-690740