Posted: 2 Apr 2015 Last revised: 18 Oct 2016
Date Written: November 1, 2015
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
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