Rainy Day Stocks

Niels Joachim Gormsen, Robin Greenwood

Research output: Working paperResearch


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
Original languageEnglish
Place of PublicationBoston
PublisherHarvard Business School
Number of pages45
Publication statusPublished - Jan 2017
SeriesHarvard Business School Working Paper

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