Sharpe Ratio and Drawdown Metrics for Event-Driven Backtests

Summary

This installment of an event-driven backtesting series explains how to summarize portfolio performance from an equity curve. It describes three measures: annualized Sharpe ratio, maximum peak-to-trough drawdown, and drawdown duration, defined as the number of trading periods spent below a prior high. The Sharpe calculation scales mean period returns relative to their standard deviation, with the annualization factor adjusted to match the data frequency. Daily, hourly, and minutely examples illustrate why the period count matters.

The article provides Python functions using pandas and NumPy and shows how to attach the results to a portfolio class. The drawdown routine tracks a running high-water mark and counts bars until a new high is reached. These are basic portfolio-level summaries; the author notes that the framework omits trade-level analysis and other risk or reward measures. The article offers implementation guidance, not empirical comparisons or evidence that these metrics alone are sufficient to evaluate a strategy.

Key ideas

• Annualized Sharpe scales average period returns by their variability and the square root of the period count.
• The annualization factor should match the frequency of the return data.
• Maximum drawdown measures the largest decline from an equity peak to a later trough.
• Drawdown duration counts trading bars until the equity curve reaches a new high.
• These portfolio summaries omit trade-level analysis and other performance measures.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.