Re-Examining the Hidden Costs of the Stop-Loss
31 Pages Posted: 22 Apr 2008
Date Written: 04/10/2008
In this paper, we present general implications of the impact of stop-losses to future returns. The use of stop-losses change return distributions, but not in the way that one would typically expect. We find that while stop-losses can reduce position volatility, hidden costs offset perceived benefits in terms of altering future returns. Use of both stop-losses and profit-taking stops separately or in conjunction offer no statistically significant difference in expected return but have a meaningful impact in returns with drift, as the expected return converges to that of the underlying.
Keywords: stop-loss, stoploss, hidden costs, hiddencosts, costs, benefits, risk, wilson ma, kira detko, guy morita
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