Do stop-loss rules add value in international equity market allocation?

Bochuan Dai, Ben R. Marshall, Nhut Hoang Nguyen and Nuttawat Visaltanachoti

Applied Economics, 2022, vol. 54, issue 14, 1584-1597

Abstract: We consider the performance of stop-loss rules in international equity market allocation. Diversifying internationally gives the potential of larger returns but often involved higher risks, so it is a natural setting to consider these rules. Our results indicate that stop-loss rules, which involve closing positions that decline by a pre-specified percentage, are an important determinant of asset allocation in a parametric portfolio policy setting. They generate portfolios that have superior mean and risk-adjusted returns for investors. This result holds in general but is economically stronger in declining markets. The outperformance is robust to the inclusion of transaction costs.

Date: 2022
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DOI: 10.1080/00036846.2021.1980201

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