Stock Vulnerability and Resilience
Czasonis, M., H. Song and D. Turkington. 2023 "Stock Vulnerability and Resilience." The Journal of Portfolio Management, 49 (5): 34 - 44
Posted: 23 Sep 2022 Last revised: 9 Sep 2023
Date Written: September 8, 2022
Abstract
We propose a parsimonious yet flexible statistical method for predicting the relative vulnerability or resilience of individual stocks to market drawdowns. Our approach compares a stock’s unique circumstances – as reflected in popular factor attributes – to the circumstances of stocks that have proven vulnerable or resilient to previous market drawdowns. Unlike other approaches, our method allows the influence of each factor attribute to vary across stocks in a nonlinear, conditional way. We test our explicit method for predicting stock vulnerability and resilience out-of-sample using the five largest market drawdowns since the Global Financial Crisis. The nonlinear composite scores we derive are reliably better predictors of cross-sectional return than any of the individual factor attributes or an ex-post linear combination of factor attributes.
Keywords: equities, investing, vulnerability, factors, quantitative methods, portfolios, risk
JEL Classification: C10, C65, G00, G10, G11, G12
Suggested Citation: Suggested Citation