The Value of Stop Loss Strategies
48 Pages Posted: 10 Aug 2008 Last revised: 4 Feb 2012
Date Written: January 29, 2009
Stop loss strategies can prevent investors from holding their losing investments too long by automatically prompting the sales of losing investments. We examine the impacts of stop loss strategies on the return and risk of individual common stocks. Our results indicate that these strategies neither reduce nor increase investors' losses relative to a buy-and-hold strategy once we extend security returns from past realizations to possible future paths. One unique stop loss mechanism, nevertheless, helps investors to reduce investment risk. These findings suggest that the value of stop loss strategies may come largely from risk reduction rather than return improvement.
Keywords: Disposition effect, bootstrapping, simulation
JEL Classification: C15, G11
Suggested Citation: Suggested Citation