29 Pages Posted: 20 Jan 2011 Last revised: 15 May 2012
Date Written: May 14, 2012
We consider which readily observable characteristics of individual stocks (e.g., option implied volatility, accounting data, analyst data) may be used to forecast subsequent extreme price movements. We are the first to explicitly consider the predictive influence of option implied volatility in such a framework, which we unsurprisingly find to be an important indicator of future extreme price movements. However, after controlling for implied volatility levels, other factors, particularly firm age and size, still have additional predictive power of extreme future returns. Furthermore, excluding predicted extreme return stocks leads to a portfolio that has lower risk (standard deviation of returns) without sacrificing performance.
Keywords: predicting extreme returns
JEL Classification: G10, G14, G17
Suggested Citation: Suggested Citation
Krieger, Kevin and Stevenson, Greg and Fodor, Andy and Mauck, Nathan, Predicting Extreme Returns and Portfolio Management Implications (May 14, 2012). Available at SSRN: https://ssrn.com/abstract=1743226 or http://dx.doi.org/10.2139/ssrn.1743226