Estimating Sharpe ratios requires the computation of the moments of price returns, which is problematic because the latter are heavy-tailed. On the other hand, the total duration of drawdowns of a time series, or equivalently the number of its upper price records, follows a Gaussian distribution that depends on its true Sharpe ratio. Reversely, this suggests an estimator of Sharpe ratios based the total duration of drawdowns. Its efficiency is several times larger than moment-based estimators for symmetric heavy-tailed price returns. Such type of data also leads mechanically to a larger number of expected price records, hence, to a smaller duration of drawdowns. Thus, for a given number of records, the absolute value of the estimated Sharpe ratios is smaller when price returnsare heavy tailed. This means that moment-based estimators are prone to overestimate true Sharpe ratios in difficult market conditions , which implies that using them for investment decisions may amplify large price returns  .
The total duration of drawdowns is shown to be an efficient and robust estimator of Sharpe ratios , especially for heavy-tailed price returns. Because such type of data mechanically reduces the expected total drawdown duration with respect to Gaussian price returns, moment-based estimators are prone to overestimate true Sharpe ratios in leptokurtic market conditions and may further amplify large price returns when they are used by trend-followers .
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Estimating Sharpe ratios requires the computation of the moments of price returns, which is problematic because the latter are heavy-tailed. On the other hand, the
The
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of a time series, or equivalently the number of its upper price records, follows a Gaussian distribution that depends on its true Sharpe ratio. Reversely, this suggests an
is shown to be an efficient and robust
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based the total duration of drawdowns. Its efficiency is several times larger than moment-based estimators for symmetric
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also leads mechanically to a larger number of expected price records, hence, to a smaller duration of drawdowns. Thus, for a given number of records, the absolute value of the estimated Sharpe ratios is smaller when price returnsare heavy tailed. This means that
mechanically reduces the expected total drawdown duration with respect to Gaussian price returns,
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difficult market conditions , which implies that using them for investment decisions may
leptokurtic market conditions and may further
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when they are used by trend-followers