Entrepreneurial finance and risk in portfolio management: Drawdown-based systematic exposure in European equities
Entrepreneurial finance and risk in portfolio management: Drawdown-based systematic exposure in European equities

Summary/Abstract: Purpose: The objective of the article is to calculate new systematic risk measures – Expected Regret of Drawdown (ERoD) Beta and Conditional Drawdown-at-Risk (CDaR) Beta – that account for the drawdowns (a decline in the value from a peak to a subsequent low) of the STOXX Europe 600 index in the period 2004–2024 across European countries and industries. These drawdown betas show how the securities behaved during market drawdowns, especially during the Great Financial Crisis and the COVID-19 crisis. Methodology: ERoD and CDaR Beta are new dynamic portfolio performance risk characteristics measuring portfolio drawdowns. Similar to the standard beta, the drawdown betas relate the expected return of an asset to the expected return of the market but are based on the concept of drawdowns. Findings: The numerical results show that drawdown beta directly measures the performance of the securities during drawdowns. The drawdown betas have negative values, suggesting a safe-haven property for certain companies during financial crises, whereas the standard beta is positive. We demonstrate that the drawdown beta is a useful tool for portfolio construction and can indicate the different performance of Healthcare, Technology, and small-value companies during the COVID-19 crisis. It can imply that those securities can provide a hedge during a similar crisis. Implications: If the negative drawdown beta is identified, it could be used as insurance to lessen risk or to perform well in the event of a crisis in active management strategies. Originality & value: The drawdown beta is an innovative dynamic portfolio performance risk measure used on the European stock market data across an extended period (2004–2024). We investigated the impact of different factors on the resilience of the company during drawdowns, including firm-size deciles, countries, and industries, providing valuable insights into the relationship between company size and resilience during downturns. The drawdown beta framework delivers a powerful tool for both academics and practitioners seeking to assess asset resilience during market drawdowns.

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