Do stop-loss rules add value in international equity market allocation?

Abstract

ABSTRACT We consider the performance of stop-loss rules in international equity market allocation. Diversifying internationally gives the potential of larger returns but often involved higher risks, so it is a natural setting to consider these rules. Our results indicate that stop-loss rules, which involve closing positions that decline by a pre-specified percentage, are an important determinant of asset allocation in a parametric portfolio policy setting. They generate portfolios that have superior mean and risk-adjusted returns for investors. This result holds in general but is economically stronger in declining markets. The outperformance is robust to the inclusion of transaction costs.