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    Rainy Day Stocks
    07 Feb 2017Working Paper Summaries

    Rainy Day Stocks

    by Niels Gormsen and Robin Greenwood
    Niels Gormsen and Robin Greenwood identify characteristics of stocks that an investor who is worried about bad times should buy— a “rainy day” portfolio. They also propose a simple methodology that places greater weight on performance achieved during bad times than performance achieved during good times, essentially evaluating returns under a risk-neutral probability measure.
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    Author 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

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: January 2017
    • HBS Working Paper Number: HBS Working Paper #17-066
    • Faculty Unit(s): Finance
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    Robin Greenwood
    Robin Greenwood
    George Gund Professor of Finance and Banking
    Anne and James F. Rothenberg Faculty Fellow
    Senior Associate Dean for Faculty Development and Research
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