strategy-lab/to_explore/pyquantnews/7_Drawdown.ipynb

This code downloads historical stock data for SPY from Yahoo Finance, calculates daily returns, and analyzes drawdowns. It defines functions to compute drawdowns and maximum drawdowns, which are essential for risk management. The drawdown function calculates the percentage decline from a peak in the cumulative return series. The max_drawdown function identifies the largest drawdown over the period. These metrics are visualized to evaluate the stock's risk.

In [ ]:

import yfinance as yf
import numpy as np

Download historical stock data for SPY from Yahoo Finance

In [ ]:

data = yf.download("SPY", start="2020-01-01", end="2022-07-31")

Calculate daily returns from the adjusted closing prices

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returns = data["Adj Close"].pct_change()

Define a function to determine the drawdown from daily returns

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def drawdown(returns):
    """Determines the drawdown
    
    Parameters
    ----------
    returns : pd.Series
        Daily returns of an asset, noncumulative
    
    Returns
    -------
    drawdown : pd.Series
    
    Notes
    -----
    This function calculates the percentage decline 
    from the peak value of cumulative returns.
    """

    # Replace the first NaN value with 0.0 for accurate calculations

    returns.fillna(0.0, inplace=True)

    # Create a series of cumulative returns over time

    cumulative = (returns + 1).cumprod()

    # Calculate the running maximum value of cumulative returns

    running_max = np.maximum.accumulate(cumulative)

    # Compute the drawdown as the percentage decline from the running maximum

    return (cumulative - running_max) / running_max

Plot the drawdown over time as an area chart

In [ ]:

drawdown(returns).plot(kind="area", color="salmon", alpha=0.5)

Define a function to determine the maximum drawdown from daily returns

In [ ]:

def max_drawdown(returns):
    """Determines the maximum drawdown
    
    Parameters
    ----------
    returns : pd.Series
        Daily returns of an asset, noncumulative
    
    Returns
    -------
    max_drawdown : float
    
    Notes
    -----
    This function identifies the largest 
    drawdown over the specified period.
    """

    # Calculate the drawdown and return the minimum value as the max drawdown

    return np.min(drawdown(returns))

Calculate the rolling maximum drawdown over a 30-day window and plot it

In [ ]:

returns.rolling(30).apply(max_drawdown).plot(kind="area", color="salmon", alpha=0.5)

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