Predicting Extreme Returns and Portfolio Management Implications
AbstractWe consider which readily observable characteristics of individual stocks (e.g., option implied volatility, accounting data, analyst data) may be used to forecast subsequent extreme price movements. We are the first to explicitly consider the predictive influence of option implied volatility in such a framework, which we unsurprisingly find to be an important indicator of future extreme price movements. However, after controlling for implied volatility levels, other factors, particularly firm age and size, still have additional predictive power of extreme future returns. Furthermore, excluding predicted extreme return stocks leads to a portfolio that has lower risk (standard deviation of returns) without sacrificing performance.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 39845.
Date of creation: 14 May 2012
Date of revision:
Implied volatility; portfolio management;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G00 - Financial Economics - - General - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-14 (All new papers)
- NEP-FOR-2012-07-14 (Forecasting)
- NEP-RMG-2012-07-14 (Risk Management)
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