Ton, Appears to be the right direction + promising; perhaps one of the forum math mavens will comment. Regards, Scott
--- In [email protected], "Ton Sieverding" <ton.sieverd...@...> wrote: > > Hi Scott, > > What about replacing MaxDD by AvgDD + 2 * StdevDD ? > > Regards, Ton. > > > ----- Original Message ----- > From: sdwcyberdude > To: [email protected] > Sent: Wednesday, September 08, 2010 4:34 PM > Subject: [amibroker] Re: AIRAP - fitness function > > > > Tomasz, > > I also use and see value in the Max DD, however, I believe it is should > only be a "secondary" measure. > > Think of a 10 year backtest. System X has 1 drawdown of 30% (max), and many > small drawdown never exceeding 5%. System Y has 1 drawdown of 25% (max), and > 10+ other drawdowns between 20 and 23%. > > Which system is more "stable"? I will invest risk capital in System X, > which has the higher max drawdown, but much fewer drawdowns of depth. > > I would love to have a measure of drawdown that more directly and > intuitively measures the depth and frequency of drawdowns per unit of time. > Correlation of the equity curve also gets at that point. > > Regarding the Omega, I am relying on a friend who studied both the advanced > math and models and uncover significant concerns with the Omega (I seem to > recall in was bias issues around skewness and kurtosis, but I might be > wrong), however it was unpublished work for hedge funds. He also developed a > proprietary alternative. Sorry I can't be more helpful on that one. > > Kind Regards, > Scott > > --- In [email protected], "tf28373" <tomfid@> wrote: > > > > Hi Scott > > > > Thanks for response. I agree that the Sortino ratio is a kind of solution > to the typical Sharp ratio disadvantages (like penalization high moments, > which for me is irrational). Nevertheless, there is no max dd taken into > account, which confuses me a bit. However, I might be too devoted to this > risk measure (max dd) - what do you think? Is mean and its variance > better/sufficient values as far as the characteristics of equity line is > considered? (This is what brain123 was supporting in many discussions.) > > > > "One should be careful if it is built upon the Omega, which I believe > introduces other problems." > > > > That is an interesting point - can you elaborate a bit on this one? In > fact I was hoping to get this kind of information when starting this thread > as - frankly speaking - I don't feel familiar with plain maths enough to > analyse it... > > > > Looking forward to your response. > > Regards > > Tomasz > > > > --- In [email protected], "sdwcyberdude" <scwalker1986@> wrote: > > > > > > Tomasz, > > > > > > Thanks for raising this question (and for the good work you do). > > > > > > The Sortino Ratio is a well regarding improvement upon the Sharpe; I > urge you to consider adding the Sortino to the base metric array. Is there a > reason you passed on it earlier? > > > > > > The Sharpe ratio has a lot of problems and I was not familiar with the > AIRAP. One should be careful if it is built upon the Omega, which I believe > introduces other problems. > > > > > > Regards, > > > Scott > > > > > > --- In [email protected], "tf28373" <tomfid@> wrote: > > > > > > > > > > > > Hello everyone > > > > > > > > I have been working on the choose of fitness function following the > > > > Howard Bundy's advices in his "Quantitative Trading Systems" and come > > > > across M. Sharma's Alternative Investments Risk Adjusted Performance > > > > (AIRAP). > > > > > > > > The equation of it is as following: > > > > > > > > AIRAP = [ E pi*(1+TRi)(1-c) ] 1/(1-c) - 1, > > > > > > > > where TRi - ith period total fund return (in my opinon it can also be > > > > ith trade net return), c - risk aversion parameter (author suggests to > > > > set its value to c=4), i=1,...,N - number of periods (as for me it can > > > > be number of trades), pi - the probability of the ith period's total > > > > return (according to the author it can be replaced with 1/N). (For > > > > futher information please check this working paper: > > > > http://www.intelligenthedgefundinvesting.com/pubs/rb-ms01.pdf > > > > <http://www.intelligenthedgefundinvesting.com/pubs/rb-ms01.pdf> .) > > > > > > > > M. Sharma argues that this measure captures all higher moments, > > > > penalizes for higher volatility and leverage (downside risk is > penalized > > > > more) and has all merits of Sharp ratio, though without its > limitations > > > > and disadvantages. I have carried out some simulations on the > artificial > > > > returns of different distributions and indeed it makes some > difference. > > > > Nevertheless what I am suspicious about is the fact that it was the > very > > > > first time I found this objective function even though it was created > by > > > > Sharma about 5 years ago. As for me it can mean that AIRAP is in fact > > > > far from being effective or/and practical fitness measure at least for > > > > trader like us and nobody use it (maybe I am wrong...). Another issue > > > > that concerns me a bit is omission of MaxDrawDown in the equation, > which > > > > - at least for me - is a very important risk measure. According to > many > > > > experienced wise people writing on this forum (like ex Mr Bundy), an > > > > effective fitness function shouls take Max DD or some comparable risk > > > > measure into consideration in order to be really useful. > > > > > > > > What do you think about AIRAP? Should I proceed with utilizing this > > > > function? > > > > > > > > I am looking forward to your response. Thank you in advance. > > > > > > > > Tomasz > > > > > > > > > >
