Mitigating Loss/Gain Asymmetry ?

[Aston08]

In doing some calculations the other day I came across the concept of "Loss/Gain Asymmetry". After spending sometime searching I was only able to find cursory information on the subject was hopeing someone mind be able to answer a question I had on the subject.

In a scenerio where a 100 units of something are acquired at a specific price and the value proceeds to increase by 100% promptly followed by a 60% loss in value. Due to the asymmetical nature of Gain/Loss ratio the remaining value would then have to increase in value 150% to return to its previous peak.

...Alright I fully understand things up to this point.


Obviously only through the benefit of hindsight would anyone know exactly how low the value would go, but after the 100% gain we know that anything greater than a 50% loss would effectly be like buying a depreciating asset to begin with.

My question is would there be someway to mitigate the asymmetry by bleeding off (selling) a certain number of units at a given rate to create a bias closer to the peak value? Clearly selling at the peak would be the most efficient, but since that value is only known in retrospect there is going to be a certain level of inefficiency that is unavoidable.

I know in finance the concept is referred to as "Scaling" ...any idea how you calculate the bleed off rate depending on the amount of upward bias being sought ?

This probably isn't going to be a question with a definitive single answer, but I was hoping someone with better math skills than I have could help me chip away at the question.

Thanks in advance

 

[fresh_42]

How to calculate when? There is certainly no way to do it in advance. However, there are many papers out there which investigates the phenomenon. Here is one which deals with the time series:

Previous research has shown that for stock indices, the most likely time until a return of a particular size has been observed is longer for gains than for losses. We establish that this so-called gain/loss asymmetry is present also for individual stocks and show that the phenomenon is closely linked to the well-known leverage effect -- in the EGARCH model and a modified retarded volatility model, the same parameter that governs the magnitude of the leverage effect also governs the gain/loss asymmetry.

https://arxiv.org/abs/0911.4679