When do stop-loss rules stop losses?
Author(s)Kaminski, Kathryn M.; Lo, Andrew W
MetadataShow full item record
We propose a simple analytical framework to measure the value added or subtracted by stop-loss rules-predetermined policies that reduce a portfolio's exposure after reaching a certain threshold of cumulative losses-on the expected return and volatility of an arbitrary portfolio strategy. Using daily futures price data, we provide an empirical analysis of stop-loss policies applied to a buy-and-hold strategy using index futures contracts. At longer sampling frequencies, certain stop-loss policies can increase expected return while substantially reducing volatility, consistent with their objectives in practical applications. Keywords: Investments; Portfolio management; Risk management; Asset allocation; Performance attribution; Behavioral finance
DepartmentSloan School of Management
Journal of Financial Markets
Kaminski, Kathryn M., and Andrew W. Lo. “When Do Stop-Loss Rules Stop Losses?” Journal of Financial Markets 18 (March 2014): 234–254 © 2013 Elsevier B.V.