Navigating Stock Price Crashes
Posted: 2 Apr 2015 Last revised: 18 Oct 2016
Date Written: November 1, 2015
Abstract
Individual equity securities are prone to large and abrupt stock price drops. In this article, the authors provide a framework for measuring, forecasting, and avoiding such stock price crashes. First, the authors identify the events that most frequently cause stock prices to crash, and then they construct a parsimonious model for forecasting stock price crashes. Finally, they examine how positioning a portfolio to reduce exposure to stocks with high crash risk can improve investment performance. This article provides a framework that should help investors construct equity portfolios with fewer stock price crashes, higher returns, and lower volatility.
Keywords: Stock Price, Crash, Earnings Announcement, Investment Performance
JEL Classification: G12, G14, M4
Suggested Citation: Suggested Citation
B. Korcan Ak
University of California, Berkeley - Haas School of Business ( email )
545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
Richard G. Sloan (Contact Author)
University of Southern California - Leventhal School of Accounting ( email )
Los Angeles, CA 90089-0441
United States