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Ulcer Index

Developed in 1987 by Peter G. Martin and published in 1989 in the book entitled “The Investor's Guide to Fidelity Funds: Winning Strategies for Mutual Fund Investors” by Peter G. Martin and Byron B. McCann, the Ulcer Index was mainly used by traders to measure short-term risk associated with trading instruments such as stocks, indices, mutual funds, and/or commodities.

The Ulcer Index defines the riskiness (or “stress”) of a trading instrument by only considering the downside volatility. This differs from other risk indicators such as standard deviation which consider both upside and downside volatility in their calculations. Since the Ulcer Index is based on the notion that only downside volatility is bad and upside volatility is good, it is calculated by measuring the depth and duration (severity) of drawdowns from recent peaks (highs) in price. According to Martin, the Ulcer Index “is the square root of the mean of the squared percentage drops in value”.

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Interpretation

High Ulcer Index values correspond to high levels or risk associated with the trading instrument. According to Martin, “the greater a drawdown in value, and the longer it takes to recover to earlier highs, the higher the UI”.

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