Falling Knifes Research

Even if underlying businesses are sound, there is lots of research around saying that value-type strategies (buying shares that are cheap relative to company assets) outperform, and the Falling Knives approach can be part of this.

We automated the process of testing falling knifes and applied it to UK data, including UK SmallCap and LargeCap shares. As no surprise the first problem to solve was a data problem. The thing is that usual sources, like FactSet and co., have a lot of unsolved issues, like bad quality of the data, some missing points, non adjusted prices, too short time series etc. Although the main problem was a survivorship which by definition causes the results to skew higher because only companies which were successful enough to survive until the end of the period were included. We solved that problem via using the high-quality LSPD database.

We made a Matlab based toolkit which produce analysis of the falling knifes approach, optimize found parameters, and produce a report which suggest the best way to invest using this idea.

The copyright of this research belongs to the big investment house in London, so we show only some illustrations here.