Analysis of drawdowns and drawups in the US$ interest-rate market

Abstract

We investigate the statistical properties of drawdowns and drawups in interest rates (US$) using over 10 years' worth of daily data. We analyse the nature of the drawdowns in terms of length of runs, magnitude of the individual price moves and coincidence of their occurrence across the maturity spectrum. We document significant positive autocorrelation for several holding periods, pronounced term structure effects and an unexpectedly low degree of coincidence in the occurrence of drawdowns across the maturity spectrum (despite high correlation in daily moves). By drawing on previous work by Rebonato et al. (2005) we try to provide a coherent explanation for a complex set of empirical observations. An essential ingredient of this explanation appears to be the existence of at least two distinct types (normal and excited) of price dynamics, with different serial correlation properties. We concur with the results by Sornette and Johansen (Significance of log-periodic precursors to financial crashes. Quant. Finance, 2001, 1, 452-471) for different asset classes that very large drawdowns belong to the 'undemocratic' case, and may therefore result from an amplification mechanism.

Entropy Analysis of Financial Time Series

“…They claim that drawdown/drawup can be explained by the onset of a well-defined microstructural phase transition, which is characterized by the emergence of the sudden persistence of daily drops, coupled with an increase in the correlated amplitude of the drops. Rebonato and Gaspari (2006) confirm these findings also for the US Treasury market.…”

“…The parameters z and χ characterize the distribution concisely: the larger the value of χ, the larger the 'typical' drawdowns; the smaller the value of z, the fatter the tails and the greater the relative likelihood of large drawdowns. Rebonato and Gaspari (2006) show, for identical and independent Gaussian returns, the expected…”

“…To our knowledge, there has been no study done on the relationship of large drawdowns (drawups) with financial time series. Rebonato and Gaspari (2006) qualitatively examined on a case-by-case basis if large draw-downs/drawups from different maturity blocks of US interest rates coincide with each other. But no quantitative, systematic measure has been proposed so far on how to analyse them.…”

International Real Estate Review

“…The latter take into account the upside phases of the respective series as well, as we do when considering drawup measures as counterparts to downside metrics. The evaluation of drawup phases is found as well in de Melo Mendes and Ratton Brandi (2004), Rebonato and Gaspari (2006), and Pospisil et al (2009), among others.…”

Coherent Asset Allocation and Diversification in the Presence of Stress Events

“…With the econophysicists we also believe that extreme events belong to a class of their own. But we do not assume that market behaviour in situations 3 See, eg, Mantegna and Stanley (2000) 4 See, eg, Sornette and Johanssen (2001) 5 Indeed, Rebonato and Chen (2009) and Rebonato and Gaspari (2006) analyize the drawdown properites of interest rates and suggest that exceptional events do belong to a different statistical class, as Sornette (2004) and Sornette and Johanssen (2001) suggest. However, they also point out that several, and not one, 'signatures' exist, each corresponding to a different way for the market to be 'distressed'.…”