Risk management in a pure unit root

Abstract

Purpose

The purpose of this paper is to communicate the science and art of stop losses.

Design/methodology/approach

This paper uses theoretical reasoning, Monte Carlo simulation, and empirical data to support and validate the claims made.

Findings

The paper expands on the reasoning introduced by risk management and shows that a stop loss is highly significant and can be the difference between zero and positive expectation in a stochastic market.

Practical implications

Risk and uncertainty both play a major part in people's lives. Every day, the paper is forced to make decisions based upon asymmetric information and unknowns. The paper might be tempted to conclude that decision making in an uncertain and risky world is something well understood. This is not true.

Originality/value

This paper aims to reduce information asymmetry and ultimately help people make better financial decisions. The buy‐and‐hold investment strategy also known as buy‐and‐hope has little scientific support. The author claims no originality when it comes to the practical implementation of the concepts discussed in this paper.

Citation

Davidsson, M. (2010), "Risk management in a pure unit root", Journal of Risk Finance, Vol. 11 No. 2, pp. 224-234. https://doi.org/10.1108/15265941011025224