The authors would like to thank David Peterson, Bong-Soo Lee, Eric Higgins, Steve Pruitt, Johnny Chan (the referee), and Mark Griffiths (the associate editor) as well as seminar participants at the University of Tulsa for their influential input.
PREDICTING EXTREME RETURNS AND PORTFOLIO MANAGEMENT IMPLICATIONS
Article first published online: 10 DEC 2013
© 2013 The Southern Finance Association and the Southwestern Finance Association
Journal of Financial Research
Volume 36, Issue 4, pages 471–492, Winter 2013
How to Cite
Fodor, A., Krieger, K., Mauck, N. and Stevenson, G. (2013), PREDICTING EXTREME RETURNS AND PORTFOLIO MANAGEMENT IMPLICATIONS. Journal of Financial Research, 36: 471–492. doi: 10.1111/jfir.12020
- Issue published online: 10 DEC 2013
- Article first published online: 10 DEC 2013
We consider which readily observable characteristics of individual stocks may be used to forecast subsequent extreme price movements. We believe we are the first to explicitly consider the predictive influence of option implied volatility in such a framework, which we find to be an important indicator. However, after controlling for implied volatility levels, other factors, particularly firm age and size, continue to have additional predictive power of extreme returns. Furthermore, excluding predicted extreme return stocks leads to a portfolio that has lower risk (standard deviation of returns and lower beta) without sacrificing performance.