Predicting Extreme Returns and Portfolio Management Implications

Kevin Krieger, Andy Fodor, Nathan Mauck and Greg Stevenson

MPRA Paper from University Library of Munich, Germany

Abstract: We consider which readily observable characteristics of individual stocks (e.g., option implied volatility, accounting data, analyst data) may be used to forecast subsequent extreme price movements. We are the first to explicitly consider the predictive influence of option implied volatility in such a framework, which we unsurprisingly find to be an important indicator of future extreme price movements. However, after controlling for implied volatility levels, other factors, particularly firm age and size, still have additional predictive power of extreme future returns. Furthermore, excluding predicted extreme return stocks leads to a portfolio that has lower risk (standard deviation of returns) without sacrificing performance.

Keywords: Implied volatility; portfolio management (search for similar items in EconPapers)
JEL-codes: G00 G11 (search for similar items in EconPapers)
Date: 2012-05-14
New Economics Papers: this item is included in nep-for and nep-rmg
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Related works:
Journal Article: PREDICTING EXTREME RETURNS AND PORTFOLIO MANAGEMENT IMPLICATIONS (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:39845

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