Risk Reduction Using Trailing Stop-Loss Rules

31 Pages Posted: 1 Apr 2019

See all articles by Bochuan Dai

Bochuan Dai

Massey University - School of Economics and Finance

Ben R. Marshall

Massey University - School of Economics and Finance

Nhut H. Nguyen

Auckland University of Technology

Nuttawat Visaltanachoti

Massey University - Department of Economics and Finance

Date Written: March 7, 2019

Abstract

We consider the effectiveness of trailing stop-loss rules which, unlike traditional stop-loss rules, involve the sell trigger price being moved higher to protect profits as prices rise. Our results indicate that while these rules have inferior mean returns to a simple buy-and-hold strategy, they do a good job of stopping losses. They generate superior risk-adjusted returns for investors with normal levels of risk aversion and perform particularly well at reducing downside risk. These results hold in all U.S. stocks and are particular strong for stocks that end up being delisted.

Keywords: Stop-Loss Rule, Risk Reduction

JEL Classification: G11, G12

Suggested Citation

Dai, Bochuan and Marshall, Ben R. and Nguyen, Nhut H. and Visaltanachoti, Nuttawat, Risk Reduction Using Trailing Stop-Loss Rules (March 7, 2019). Available at SSRN: https://ssrn.com/abstract=3338243 or http://dx.doi.org/10.2139/ssrn.3338243

Bochuan Dai (Contact Author)

Massey University - School of Economics and Finance ( email )

Private Bag 11-222
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New Zealand

Ben R. Marshall

Massey University - School of Economics and Finance ( email )

Private Bag 11-222
Palmerston North, 30974
New Zealand
64 6 350 5799 (Phone)
64 6 350 5651 (Fax)

Nhut H. Nguyen

Auckland University of Technology ( email )

55 Wellesley St East
Auckland, Auckland 1010
New Zealand
+64 9 921 9999 (Phone)

Nuttawat Visaltanachoti

Massey University - Department of Economics and Finance ( email )

School of Economics and Finance
Private Bag 102904, NSMC
Auckland
New Zealand
64 9 414 0800 (43169) (Phone)
64 9 441 8177 (Fax)

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