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Decoding Black Swan: A Quantitative Approach to Tactical Stock Investing

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Abstract: In this paper we examine unanticipated outliers of stock market. Weather these outliers are truly Black Swans that can not be anticipated or they are avoidable? Also we try to evolve a quantitative strategy to earn superior returns. The simple strategy not only removes outliers from portfolio but also increases average daily returns from 0.05% to 0.35%. To test the risk return proposition we have used Sharpe ratio. We are also able to conclude that the daily Sharpe ratio shoots up 15 times in the results. We found increase in volatility in a declining market as Standard Deviation increases in declining market. We also conclude that returns are generated only during up trend in the market.

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H/T Ewallstreeter

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