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Tactical allocation in falling stocks: Combining momentum and solvency ratio signals

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  • Piotr Arendarski

    ()
    (University of Warsaw, Faculty of Economic Sciences)

Abstract

We identified 4500 US stocks with year ending losses of 50 percent or more during the 2001-2011 period. We screened our "falling knives" for financial strength to promote a greater likelihood of recovery and minimize any survivorship bias. We added the constraints of Altman Z-Scores, debt/equity ratio, and current ratio to our data set. We use GARCH-in-mean model to control the risk of the strategies. The results show consistent improvement of risk-standardized return profiles of the strategies in comparison with buy and hold strategy.

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File URL: http://www.wne.uw.edu.pl/inf/wyd/WP/WNE_WP67.pdf
File Function: First version, 2012
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Bibliographic Info

Paper provided by Faculty of Economic Sciences, University of Warsaw in its series Working Papers with number 2012-01.

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Length: 14 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:war:wpaper:2012-01

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Related research

Keywords: falling stocks; contrarian investing; financial strength ratios; GARCH in mean model; Augmented Dickey-Fuller test;

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  1. I. Roko & M. Gilli, 2008. "Using economic and financial information for stock selection," Computational Management Science, Springer, vol. 5(4), pages 317-335, October.
  2. Bhandari, Laxmi Chand, 1988. " Debt/Equity Ratio and Expected Common Stock Returns: Empirical Evidence," Journal of Finance, American Finance Association, vol. 43(2), pages 507-28, June.
  3. De Bondt, Werner F M & Thaler, Richard, 1985. " Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
  4. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
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