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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
      Co-Unit Head, Finance
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