Thou should not panic! Let calmness fight the Crocodile Bite

Usman Ayub, Uzma Qaddus, Muhammad Zakaria, Attayah Shafique and Junaid Ahmed

Physica A: Statistical Mechanics and its Applications, 2018, vol. 509, issue C, 302-315

Abstract: This paper proposes a rule of a thumb, named as crocodile rule for Pakistan Stock Exchange, which is an emerging stock market. According to this rule when a crocodile attacks the only recourse is to stop the struggle to safeguard. In this way, the crocodile will assume the person is dead and it will stop the attack. If applied to stock markets, the rule portrays that when performance falls below a threshold level the investors must not pull back the funds and shall continue their investments, as there is significant chance of recovery. The rule is tested in two steps. Firstly, we will check by forecasting the probability. Secondly, we will use these probabilities to test the rule of thumb. For empirical analysis, data is taken on monthly basis from 2000 to 2017. The results for the first step show that mean forecasting error for all categories of stocks is close to zero. Furthermore, the rule is valid for all three categories of stocks; risky, size and value on Pakistan Stock Exchange. The results from 2000–2017 show, that on average there is 74% chance of recoverywith minimum and maximum recovery chances of 66% and 83% respectively. Where 83% chance is very optimistic, 66% chance seems quite low, but investors must remember no alarming situation can be dealt with fright and thus, thou should not panic! Let calmness fight the crocodile bite.

Keywords: Sharpe ratio; Rule of thumb; Crocodile rule (search for similar items in EconPapers)
JEL-codes: C58 G17 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:509:y:2018:i:c:p:302-315

DOI: 10.1016/j.physa.2018.06.040

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