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  • 2017
  • Working Paper
  • HBS Working Paper Series

Rainy Day Stocks

By: Niels Gormsen and Robin Greenwood
  • Format:Print
  • | Language:English
  • | Pages:48
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Abstract

We study the good- and bad-times performance of equity portfolios formed on characteristics. Many characteristics associated with good performance during bad times – value, profitability, small size, safety, and total volatility – also perform well during good times. Stocks with characteristics signifying high liquidity, such as high turnover and low bid ask spreads, perform well during bad times but otherwise underperform. We develop a simple but flexible procedure to recover a “risk neutral alpha” that recognizes a 1% return experienced during bad times as being more valuable than a 1% return generated during good times. We also show how an investor can build a “rainy day” portfolio that minimizes underperformance during bad times.

Keywords

Performance; Stocks; Situation or Environment

Citation

Gormsen, Niels, and Robin Greenwood. "Rainy Day Stocks." Harvard Business School Working Paper, No. 17-066, January 2017.
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About The Author

Robin Greenwood

Finance
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Related Work

    • 2017
    • Faculty Research

    Rainy Day Stocks

    By: Niels Gormsen and Robin Greenwood
Related Work
  • Rainy Day Stocks By: Niels Gormsen and Robin Greenwood
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