Navigating Stock Price Crashes

Posted: 2 Apr 2015 Last revised: 18 Oct 2016

B. Korcan Ak

University of California, Berkeley - Haas School of Business

Steven Bruce Rossi

RS Investments

Richard G. Sloan

University of California, Berkeley - Accounting Group

Scott Tracy

RS Investments

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

Ak, B. Korcan and Rossi, Steven Bruce and Sloan, Richard G. and Tracy, Scott, Navigating Stock Price Crashes (November 1, 2015). Journal of Portfolio Management, Vol. 42, No. 4, 2016. Available at SSRN: https://ssrn.com/abstract=2585811 or http://dx.doi.org/10.2139/ssrn.2585811

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

Steven Bruce Rossi

RS Investments ( email )

1 Bush Street
9th Floor
San Francisco, CA 94104
United States

Richard G. Sloan (Contact Author)

University of California, Berkeley - Accounting Group ( email )

Haas School of Business
Berkeley, CA 94720
United States

Scott Tracy

RS Investments ( email )

1 Bush Street
9th Floor
San Francisco, CA 94104
United States
4155167129 (Phone)

Paper statistics

Abstract Views
5,576