When do stop-loss rules stop losses?

Kathryn M. Kaminski and Andrew Lo ()

Journal of Financial Markets, 2014, vol. 18, issue C, 234-254

Abstract: We propose a simple analytical framework to measure the value added or subtracted by stop-loss rules—predetermined policies that reduce a portfolio’s exposure after reaching a certain threshold of cumulative losses—on the expected return and volatility of an arbitrary portfolio strategy. Using daily futures price data, we provide an empirical analysis of stop-loss policies applied to a buy-and-hold strategy using index futures contracts. At longer sampling frequencies, certain stop-loss policies can increase expected return while substantially reducing volatility, consistent with their objectives in practical applications.

Keywords: Investments; Portfolio management; Risk management; Asset allocation; Performance attribution; Behavioral finance (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (18)

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Related works:
Working Paper: When Do Stop-Loss Rules Stop Losses? (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:18:y:2014:i:c:p:234-254

DOI: 10.1016/j.finmar.2013.07.001

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