New strategies:
#942 – MACD-V: Volatility Normalised Momentum
Period of rebalancing: Daily
Markets traded: equities
Instruments used for trading: CFDs, ETFs, futures
Complexity: Moderately complex strategy
Backtest period: 1991-2021
Indicative performance: 13.68%
Estimated volatility: –
Source paper:
Spiroglou, Alex: MACD-V: Volatility Normalised Momentum
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4099617
Abstract:
The paper will focus on the study of momentum, using a very popular technical analysis indicator, the Moving Average Convergence Divergence (MACD), created by one of the most respected analysts of our time – Gerald Appel. This paper is comprised of 6 parts. 1. In the first section we will examine why this topic matters to you; 2. Then we will focus on the MACD itself. We will do a brief description of its construction, the most elementary ways to use it and then a review of the five limitations it has. This is a section that is familiar territory to all technicians; 3. In the third section, we will show a widely known suggestion to deal with these limitations, that does improve one, but does not solve all of them; 4. In the fourth section we will present our own solution, which remedies the shortcomings, while creating unique advantages (edges) that would not be possible to obtain via the classic MACD; 5. Subsequently we will create another novel indicator (MACD-VH); 6. In the last section, we will use our framework to improve existing tools in TA literature and explore new techniques.
#943 – Mercury Retrograde Astrology Trading Strategy in Chinese Market
Period of rebalancing: Daily
Markets traded: equities
Instruments used for trading: CFDs, ETFs, futures
Complexity: Simple strategy
Backtest period: 2015-2021
Indicative performance: 22.12%
Estimated volatility: 40.28%
Source paper:
Kou, Shubo and Ma, Xiyuan: Mercury, Mood, and Mispricing: A Natural Experiment in the Chinese Stock Market
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4593107
Abstract:
This paper examines the effects of superstitious psychology on investors’ decision making in the contextof Mercury retrograde, a special astronomical phenomenon meaning “everything going wrong”. Usingnatural experiments in the Chinese stock market, we find a significant decline in stock prices, approximately -3.14% in the vicinity of Mercury retrogrades, with a subsequent reversal following these periods. The Mercury effect is robust after considering seasonality, the calendar effect, and well-known firm-level characteristics. Our mechanism tests are consistent with model-implied conjectures that stocks covered by higher investor attention are more influenced by superstitious psychology in the extensive and intensive channels. A superstitious hedge strategy motivated by our findings can generate an average annualized market-adjusted return of 8.73%.
#944 – Overnight-Intraday Reversal in Futures
Period of rebalancing: Intraday
Markets traded: equities
Instruments used for trading: CFDs, futures
Complexity: Simple strategy
Backtest period: 2004-2018
Indicative performance: 59.98%
Estimated volatility: 10.87%
Source paper:
Kosowski, Robert and Liu, Chun and Liu, Chun and Liu, Yang and Wang, Tianyu: Overnight-Intraday Reversal Everywhere
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4605208
Abstract:
A strategy that buys securities with low past overnight returns and sells securities with high past overnight returns generates sizeable out-of-sample intraday returns and Sharpe ratios in all major asset classes. This strategy – labeled as overnight-intraday reversal – delivers an average return that is about two to five times larger than those generated by the conventional reversal strategy. Investor sentiment, macro-news announcements, and market uncertainty fail to explain this overnight-intraday reversal return. Our findings are consistent with an asset class-specific market maker liquidity provision mechanism, and we find that cross sectional return dispersion could well predict the strategy returns.
#945 – Military Expenditures and Performance of the Stock Markets
Period of rebalancing: Yearly
Markets traded: equities
Instruments used for trading: ETFs, funds
Complexity: Simple strategy
Backtest period: 1991-2022
Indicative performance: 2.02%
Estimated volatility: 2.91%
Source paper:
Dujava, Cyril and Vojtko, Radovan: Military Expenditures and Performance of the Stock Markets
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4637610
Abstract:
The article from Quantpedia titled “Military Expenditures and Performance of the Stock Markets” examines the relationship between national military spending and stock market performance. The core question it addresses is whether countries with significant military expenditures see a corresponding outperformance in their stock markets. To explore this, the article references various studies and employs its own analyses. The overarching conclusion from Quantpedia’s study suggests that while high military expenditures have correlated with solid stock market performance in the U.S., this pattern does not hold universally for other countries. This comprehensive analysis indicates that the relationship between military spending and stock market performance is complex and varies significantly between countries and economic contexts.
#946 – Industry-adjusted Reversal
Period of rebalancing: Monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Backtest period: 1985-2022
Indicative performance: 4.85%
Estimated volatility: 9.86%
Source paper:
Blitz, David and van der Grient, Bart and Honarvar, Iman: Reversing the Trend of Short-Term Reversal
https://ssrn.com/abstract=4575689
Abstract:
The classic short-term reversal effect has steadily weakened over time, to the point of now having vanished entirely in most regions. However, the strategy can be revived by countering its tendency to go against short-term momentum in industry and factor returns. Enhanced short-term reversal strategies show a higher return with lower risk and have remained effective over time, culminating in more than double the risk-adjusted performance. Implementation challenges can best be overcome by combining short-term reversal with other short-term alpha signals. Various features of the short-term reversal strategy indicate that the premium stems from temporary imbalances between supply and demand. Investors in the strategy therefore effectively act as liquidity providers, contributing to a more efficient functioning of capital markets.
#947 – Abnormal Overnight Earnings Return Factor in China
Period of rebalancing: Daily
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Backtest period: 2005-2019
Indicative performance: 9.17%
Estimated volatility: 9.86%
Source paper:
Liu, Junhao and Hope, Ole-Kristian and Hu, Danqi, Earnings Announcements in China: Overnight-Intraday Disparity
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4501822
Abstract:
Based on a unique arrangement of trading and disclosure times around earnings announcements in the Chinese stock market, we provide evidence of a striking overnight-intraday disparity in terms of the reaction to earnings news. Specifically, we find that the overnight period exhibits a strong and consistent reaction to earnings announcements, whereas the intraday period trades against both the earnings news and the prior market reaction during the overnight period. In addition, we show that abnormal overnight returns on earnings announcement days exhibit strong predictability for future stock returns, consistent with the overnight returns containing value-relevant signals. In contrast, we observe no return predictability for abnormal intraday returns on earnings announcement days, which as a result, also undermines the return predictability of abnormal daily returns. We propose possible explanations for the overnight-intraday disparity. We conclude that the differences in trading mechanisms between the two periods as well as in investor composition likely drive the phenomenon.
#948 – Illiquid Bitcoin Options
Period of rebalancing: Daily
Markets traded: cryptos
Instruments used for trading: cryptos
Complexity: Very complex strategy
Backtest period: 2018-2021
Indicative performance: 186.15%
Estimated volatility: 301.63%
Source paper:
Guo, Yang and Li, Jiasun and Luo, Mei and Wang, Yintian: Illiquid Bitcoin Option
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4149934
Abstract:
This paper conducts a first look into the regulated Bitcoin options market in the United States. Compared to stock options, bitcoin options tend to be ten times more illiquid as measured by bid-ask spreads. The illiquidity significantly affects bitcoin options pricing: Given that investors are on average net sellers of bitcoin options, heightened illiquidity is associated with a significant premium in subsequent delta-hedged returns, which also strengthens under more imbalanced investor orders. To support the reasonings behind our findings, we further exploit a policy change that allows retail participation and significantly influences order imbalances in the Bitcoin options market.
New research papers related to existing strategies:
#687 – Intangible Factor in US Equities
Bacciardi, Mattia and Wang, Haifeng and Mei, Jishan and Yang: Miao, Intangibles as a Quality Attribute
https://ssrn.com/abstract=4399521
Abstract:
Factor investing provides investors with a low-cost path to participate in long-term stock returns. The quality factor is among the most well-established equity factors with important empirical and practical implications. However, compared with other factors, the quality factor is less well defined. This article demonstrates that the intangible asset intensity (IAI) is a viable quality attribute that complements other commonly used quality characteristics. Our analysis shows that 1) IAI interacts and enhances other commonly used quality metrics, 2) IAI is not fully priced by analysts and existing commonly used risk factors, 3) the IAI premium is not specific to a particular sector and cannot be explained away by sector exposure, and 4) the IAI premium is not confined to a particular time period or a specific size bucket. Putting together, by aggregating IAI with other commonly used quality attributes, such as gross profitability, equity capital dilution, and change of net operating capital, our findings suggest that the quality factor would be enhanced by the inclusion of companies with a high level of intangible capital investment.
#791 – Institutional Equity Momentum in China
Fang, Yue and Luo, Deming and Yao, Zhongwei: Belief Dispersion in the Chinese Stock Market and Fund Flows
https://ssrn.com/abstract=4599464
Abstract:
This study explores how Chinese mutual fund managers’ degrees of disagreement (DOD) on stock market returns affect investor capital allocation decisions using a novel text-based measure of expectations in fund disclosures. In the time series, the DOD negatively predicts market returns. Cross-sectional results show that investors correctly perceive the DOD as an overpricing signal and discount fund performance accordingly. Flow-performance sensitivity (FPS) is diminished during high dispersion periods. The effect is stronger for outperforming funds and funds with substantial investments in bubble and high-beta stocks, but weaker for skilled funds. We also discuss financial sophistication of investors and provide evidence that our results are not contingent upon such sophistication.
#826 – News Sentiment and Equity Returns – BERT ML Model
Golez, Benjamin and Karapandza, Rasa and Wisser, Frederik: News Sentiment
https://ssrn.com/abstract=4492023
Abstract:
We introduce a novel method for training computer algorithms to measure news sentiment. Our approach leverages human-coded sentiment scores from over 200,000 newspaper articles to teach the computer to select words, word combinations, and their linear weights. In an out-of-sample test, examining newspaper articles about US companies, we show that: (i) our news sentiment metric displays a bimodal distribution similar to that observed in the human-coded sentiment scores, (ii) our news metric outperforms the widely-used bag-of-words approach and recent machine learning models in explaining human-coded news sentiment, and (iii) our news sentiment metric serves as a robust predictor for daily stock returns.
#256 – Shorting Volatility During FOMC Meeting Days
Huang, Hong-Gia and Tsai, Wei-Che and Yang, J. Jimmy: Trading Activity of VIX Futures and Options Around FOMC Announcements
https://ssrn.com/abstract=4559935
Abstract:
This research investigates the information content of volatility trading in VIX derivatives under a high-frequency framework. We provide empirical evidence that the abnormal order imbalances of VIX futures and call (put) options are significantly negative (positive) during FOMC embargoes. Our results remain robust under various empirical approaches for examining FOMC announcements. We also find that the VIX return (trading volume) is negatively (positively) associated with FOMC announcements. Overall, we document short-lived informational advantages in the VIX derivatives market and provide evidence of potential information leakage during FOMC embargoes.
#100 – Trading WTI/BRENT Spread
Fanelli, Viviana and Fontana, Claudio and Rotondi, Francesco: A Hidden Markov Model for Statistical Arbitrage in International Crude Oil Futures Markets
https://ssrn.com/abstract=4558702
Abstract:
In this work, we study statistical arbitrage strategies in international crude oil futures markets. We analyse strategies that extend classical pairs trading strategies, considering the two benchmark crude oil futures (Brent and WTI) together with the newly introduced Shanghai crude oil futures. We document that the time series of these three futures prices are cointegrated and we model the resulting cointegration spread by a mean-reverting regime-switching process modulated by a hidden Markov chain. By relying on our stochastic model and applying online filter-based parameter estimators, we implement and test a number of statistical arbitrage strategies. Our analysis reveals that statistical arbitrage strategies involving the Shanghai crude oil futures are profitable even under conservative levels of transaction costs and over different time periods. On the contrary, statistical arbitrage strategies involving the three traditional crude oil futures (Brent, WTI, Dubai) do not yield profitable investment opportunities. Our findings suggest that the Shanghai futures, which has already become the benchmark for the Chinese domestic crude oil market, can be a valuable asset for international investors.
And several interesting free blog posts that have been published during the last 2 weeks:
What Can We Extract From the Financial Influencers’ Advice?
Social media are often the main and primary choice of information in almost every area of our lives, and they also influence the financial decisions of retail traders and investors. A lot of people give opinions anywhere on the Internet; some are respected, others are disrespected, some are more well-known, and others obscure. But the power of those people, financial influencers, as a group, is substantial as they create the market sentiment. But what’s the real value of their advice? Can we extract useful information from their opinions?
Plus, the following trading strategies have been backtested in QuantConnect in the previous two weeks:
#40 – High-Frequency Arbitrage with ETF Twins
#679 – Carbon Emmision Intensity in Stocks
#932 – Timing Betting-Against-Beta (BAB) Anomaly v.2
#942 – MACD-V: Volatility Normalised Momentum
#943 – Mercury Retrograde Astrology Trading Strategy in Chinese Market
