The Value of Stop Loss Strategies

48 Pages Posted: 10 Aug 2008 Last revised: 4 Feb 2012

See all articles by Adam Y.C. Lei

Adam Y.C. Lei

Midwestern State University

Huihua Li

St. Cloud State University

Date Written: January 29, 2009

Abstract

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

Lei, Adam Y.C. and Li, Huihua, The Value of Stop Loss Strategies (January 29, 2009). Financial Services Review, Vol. 18, No. 1, pp. 23-51, 2009. Available at SSRN: https://ssrn.com/abstract=1214737 or http://dx.doi.org/10.2139/ssrn.1214737

Adam Y.C. Lei (Contact Author)

Midwestern State University ( email )

3410 Taft Blvd
Wichita Falls, TX 76308
United States
(940) 397-4403 (Phone)
(940) 397-4693 (Fax)

HOME PAGE: http://www.adamyclei.com/

Huihua Li

St. Cloud State University ( email )

Saint Cloud, MN 56301
United States
(320) 308-3231 (Phone)
(320) 255-3986 (Fax)

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