Economy & PolicyCore researchlive in production

Drawdown-Recovery Premium

Updated annualData needs: lowlong only

RFS

2020

Review of Financial Studies

#40 max_drawdown_premium — Atilgan-Bali-Demirtas-Gunaydin 2020.

Citation only, paper link pending.

In plain terms

Stocks that suffered the deepest 1-year drawdowns earn HIGHER subsequent returns — compensation for tail risk.

How it works

Atilgan-Bali-Demirtas-Gunaydin 2020: stocks with the worst trailing left-tail outcomes (deepest 1y max drawdown, fattest CVaR(5%)) earn HIGHER subsequent returns — risk compensation for crash exposure. Standard finance ("low-risk anomaly") would predict the opposite; this is one of the few risk factors that actually points the textbook direction. Long when MaxDD > 30% in last 252d AND price now > 60d MA (survivor-bias-aware "emerged from the pit" filter).

Live results

26 times picked on its own · 65 times inside a blend (44 beat the stock) · updated 2026-06-06

This strategy is a frequent ingredient in blends that combine a few strategies on one stock. It has contributed to 65 such blended picks (44 of which beat simply holding the stock). Picking it on its own is only one of the ways it shows up.

How its picks scored vs. buy & hold

Each pick is graded on a recent year it was never tuned on, against simply owning the same stock

Where its edge concentrates

Share of picks in each company-size group that beat buy & hold

How often it trades

Active vs. patient. Bars on the left mean it waits for rare setups; bars on the right mean it trades often

Return vs. buy & hold

How much each pick beat or trailed simply owning the stock over the test year (extreme microcap moves trimmed)

Loading substrate evidence…

Data dependencies

Daily prices
Adjusted-close OHLCV for every US-listed ticker; primary price feed.

Expected edge

Reported return: ~2-3% ann. residual after distress controls

Status: contested in pure form (overlaps with distress / O-score) — once you control for default-risk proxies, the residual sleeve is ~2-3% annualized but stable.

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