Extreme stock returns

D Glickman, DiRienzo Ag and R Ochman
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D Glickman: State Street Global Advisors

Journal of Asset Management, 2001, vol. 2, issue 2, No 2, 107-127

Abstract: Abstract We identify characteristics of stocks in the Russell 1000 and 2000 that exhibit extreme (in the top and bottom 2.5 per cent) total returns over the next quarter. Using these characteristics, we develop a model to identify 50 (100) stocks as expected extreme performers in the Russell 1000 (2000). Over 22 per cent (16 per cent) of firms that we identify as expected extreme performers actually are extreme performers in the next quarter. Moreover, we contrast the characteristics of rockets (in the top 2.5 per cent) with torpedoes (in the bottom 2.5 per cent). Using these characteristics, we develop a model to identify expected rockets and torpedoes. We develop a strategy that forms portfolios long on expected rockets and short on expected torpedoes. This strategy returns an average of 8.7 per cent (7.3 per cent) and standard deviation of 19.4 per cent (10.5 per cent) per quarter using the Russell 1000 (2000) universe. Defining risk as the probability of exhibiting extreme total returns over the next quarter, we find that growth stocks are more risky than value stocks in the Russell 1000 and 2000 in the period from 1992 to 2000.

Keywords: volatility; market efficiency; behavioural finance; stock returns; fundamental analysis (search for similar items in EconPapers)
Date: 2001
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DOI: 10.1057/palgrave.jam.2240039

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