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

Author

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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.

Suggested Citation

  • Piotr Arendarski, 2012. "Tactical allocation in falling stocks: Combining momentum and solvency ratio signals," Working Papers 2012-01, Faculty of Economic Sciences, University of Warsaw.
    • Handle: RePEc:war:wpaper:2012-01
    as

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    File URL: http://www.wne.uw.edu.pl/inf/wyd/WP/WNE_WP67.pdf
    File Function: First version, 2012
    Download Restriction: no
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    References listed on IDEAS

    as
    1. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W, 1994. "Contrarian Investment, Extrapolation, and Risk," Journal of Finance, American Finance Association, vol. 49(5), pages 1541-1578, December.
    3. I. Roko & M. Gilli, 2008. "Using economic and financial information for stock selection," Computational Management Science, Springer, vol. 5(4), pages 317-335, October.
    4. repec:bla:jfinan:v:43:y:1988:i:2:p:507-28 is not listed on IDEAS
    5. 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.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    falling stocks; contrarian investing; financial strength ratios; GARCH in mean model; Augmented Dickey-Fuller test;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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