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Best Stock Portfolio Styles During and After Crashes

| | Posted in: Momentum Investing, Size Effect, Value Premium, Volatility Effects

Are there equity styles that tend to perform relatively well during and after stock market crashes? In their April 2020 paper entitled "Equity Styles and the Spanish Flu", Guido Baltussen and Pim van Vliet examine equity style returns around the Spanish Flu pandemic of 1918-1919 and five earlier deep U.S. stock market corrections (-20% to -25%) in 1907, 1903, 1893, 1884 and 1873. They construct three factors by:

  1. Separating stocks into halves based on market capitalization.
  2. Sorting the big half only into thirds based on dividend yield as a value proxy, 36-month past volatility or return from 12 months ago to one month ago. They focus on big stocks to avoid illiquidity concerns for the small half.
  3. Forming long-only, capitalization-weighted factor portfolios that hold the third of big stocks with the highest dividends (HighDiv), lowest past volatilities (Lowvol) or highest past returns (Mom).

They also test a multi-style strategy combining Lowvol, Mom and HighDiv criteria (Lowvol+) and a size factor calculated as capitalization-weighted returns for the small group (Small). Using data for all listed U.S. stocks during the selected crashes, they find that:

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