Stop-Loss Regime Switching 2018
“Stop-loss strategies with serial correlation, regime switching, and transaction costs” (International Review of Financial Analysis 56, 2018, pp. 88-115, Elsevier). The paper derives closed-form expressions for the return impact of stop-loss / regime-exit rules on assets that are serially correlated, regime-switching and subject to transaction costs, and applies them to a large sample of individual US stocks. Its central finding is skeptical: tight stop-loss strategies tend to underperform buy-and-hold in a mean-variance framework because frequent exits generate excessive trading costs, with outperformance possible only when return autocorrelation (persistence) is sufficiently high. It appears in this vault as deliberate negative evidence for Regime-Based Asset Allocation, formalising why turnover and regime persistence — not signal sophistication — determine whether a regime-exit strategy beats the benchmark.
Connections
- Regime-Based Asset Allocation — reports_underperformance, source: https://www.sciencedirect.com/science/article/abs/pii/S1386418117300472
- Transaction Costs and Slippage — supports, source: https://www.sciencedirect.com/science/article/abs/pii/S1386418117300472
- Buy-and-Hold Benchmark — compares_benchmark, source: https://www.sciencedirect.com/science/article/abs/pii/S1386418117300472
Sources
- “Stop-loss strategies with serial correlation, regime switching, and transaction costs.” International Review of Financial Analysis 56 (2018), 88-115. https://www.sciencedirect.com/science/article/abs/pii/S1386418117300472