Quantpedia Premium Update – April 7th

New Strategies:

#1114 – IPOs Negative Returns After Options Listing

Period of rebalancing: Weekly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Very Complex strategy
Backtest period: 1996-2017
Indicative performance: 10.43%
Estimated volatility: 5.47%

Source paper:

Chemmanur, Thomas J. and Ornthanalai, Chayawat and Zheng, Xiang: What is the Role of the Options Market? Evidence from Newly Public Companies
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5147887
Abstract:
Stock returns of newly public companies are significantly lower in the weeks after their options begin trading, on average. We do not find the same effect on seasoned firms, and the result is unlikely to be explained by the timing of when the exchanges list options. We rule out the relaxation of short-sale constraints as an explanation because security-lending data suggest that short-sale constraints worsen after options begin trading. Open-close option volume data show that proprietary trading firms accumulate negative equity exposure on newly public companies by purchasing put options. These put-buying activities correctly predict the stock return of newly public companies and lead option market makers to hedge in the direction that exacerbates the underlying equity short-sale constraints. We provide evidence suggesting that the information advantage of proprietary trading firms comes from their affiliation with the underwriter who took the company public. Our results compellingly support the role of the options market as a venue for information-based trading rather than mitigating short-sale constraints.

#1115 – Margin Debt Market Timing Strategy

Period of rebalancing: Monthly
Markets traded: equities, bonds
Instruments used for trading: ETFs
Complexity: Moderately Complex strategy
Backtest period: 1998-2024
Indicative performance: 8.8%
Estimated volatility: 8.47%

Source paper:

Beluská, Soňa and Vojtko, Radovan: Can Margin Debt Help Predict SPY’s Growth Bear Markets?
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5198812
Abstract:
Navigating the financial markets requires a keen understanding of risk sentiment, and one often-overlooked dataset that provides valuable insights is FINRA’s margin debt statistics. Reported monthly, these figures track the total debit balances in customers’ securities margin accounts—a key proxy for speculative activity in the market. Since margin accounts are heavily used for leveraged trades, shifts in margin debt levels can signal changes in overall risk appetite. Our research explores how this dataset can be leveraged as a market timing tool for US stock indexes, enhancing traditional trend-following strategies that rely solely on price action. Given the current uncertainty surrounding Trump’s presidency, margin debt data could serve as a warning system, helping investors distinguish between market corrections and deeper bear markets.

#1116 – Intraday Option Reversals

Period of rebalancing: Intraday
Markets traded: equities
Instruments used for trading: options
Complexity: Very Complex strategy
Backtest period: 2020-2023
Indicative performance: 62.75%
Estimated volatility: 26.81%

Source paper:

Beckmeyer, Heiner and Filippou, Ilias and Zhou, Guofu and Zhou, Zhaoque: Intraday Option Reversals: Return Predictability and Market Efficiency
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5081696
Abstract:
We find the first option reversal patterns intraday: returns reverse half-hourly during the trading day. The reversals are both economically and statistically significant and are robust to transaction costs and various controls, such as implied volatility changes and market frictions. The reversals are unrelated to cross-day momentum. Additionally, we provide an option-demand theoretical framework to explain the patterns. Our findings suggest that intraday demand pressures are important for asset pricing intraday, which drives the reversals and has profound implications for market efficiency.

#1117 – Forecasting Corporate Bond Index Returns with Firm Characteristics and Macro Variables

Period of rebalancing: Quarterly
Markets traded: bonds
Instruments used for trading: ETFs, funds
Complexity: Very Complex strategy
Backtest period: 1996-2022
Indicative performance: 5.93%
Estimated volatility: 6.45%

Source paper:

Cao, Jie (Jay) and Song, Linjia and Yang, Ruijing and Zhan, Xintong (Eunice): Forecasting Corporate Bond Index Returns with Firm Characteristics and Macro Variables
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5116120
Abstract:
This study investigates the return predictability of U.S. corporate bond indexes by combining 180 aggregate firm characteristics and 65 macroeconomic variables. Utilizing various shrinkage methods, we find that these combined predictors can effectively forecast returns of corporate bond indexes, demonstrating both statistical and economic significance. Asset allocation strategies based on our findings can deliver substantial economic gains for investors, with the highest Sharpe ratio reaching 1.03. Our analysis further identifies firm profitability, leverage, growth potential, and default risk as the key predictors of corporate bond index returns.

#1118 – Betting on Credit Betas

Period of rebalancing: Monthly
Markets traded: bonds
Instruments used for trading: bonds
Complexity: Very Complex strategy
Backtest period: 1999-2024
Indicative performance: 2.07%
Estimated volatility: 4.08%

Source paper:

Mota, Lira and Nobrega, Tomas: Betting on Credit Betas
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5052978
Abstract:
Duration is an important driver of bond return volatility and, consequently, an important driver of market betas. In credit markets, we show that “betting against beta” (BAB) strategy closely resembles a betting against duration strategy. We introduce a new method to estimate conditional betas that more accurately capture the effect of time-varying duration. Our findings reveal that long-short portfolios sorted on duration produce negative alphas, consistent with Frazzini and Pedersen (2014) BAB. However, when controlling for duration, long-short portfolios sorted on beta generate positive alphas of a comparable magnitude. These results are robust to using Treasuries to hedge duration risk. A combined strategy of betting against duration and betting on betas yields a market-orthogonal Sharpe ratio of 1.1, which is almost four times the 0.31 duration hedged market Shape ratio. Leverage constraints alone cannot explain our results.

New research papers related to existing strategies:

#4 – Overnight Anomaly

Liu, Xin and Zhang, Terry and Zhang, Yaodong: Hidden Cost of ETF Investing: Retail Demand Shocks and Limits to Arbitrage
https://ssrn.com/abstract=5168733
Abstract:
By decomposing close-to-close mid-quote returns of ETFs into their overnight and intraday components, we find that the overnight return is significantly positive, whereasthe intraday return is negative. This overnight-intraday return differential is ubiquitous across ETFs tracking different asset classes or assets located in different timezones. This phenomenon cannot be explained by differences in overnight and intraday risks, macroeconomic announcements, or information asymmetry. Instead, ouranalysis reveals that the return pattern is primarily driven by demand shocks from retail investors and limited supply from arbitrageurs. These results indicate that theconvenience of buying ETFs during intraday trading hours carries additional costs to investors.

#568 – Momentum effect in Chinese B-shares

Peng, Liansheng and Wang, Haohan and Xu, Haoyu: Finding the Missing Momentum in China
https://ssrn.com/abstract=5133979
Abstract:
The momentum effect exists in Chinese stock markets, but momentum signals are contaminated by noise. We use the decomposition method of Hou and Loh (2016) to examine a large number of potential explanations that may contribute to or weaken the momentum effect. The results show that variables related to retail investor significantly dampen the momentum effect. Similar to findings in the U.S. stock market, underreaction to fundamental information is the main driver of momentum. We construct a Chinese momentum strategy by removing the impeding components, yielding a monthly five-factor alpha of 1.26%, which is comparable to results in the literature.

#568 – Momentum effect in Chinese B-shares
#956 – News-Linked Momentum in China

Liu, Xin and Tan, Songtao and Xu, Yuchen and Yuan, Peixuan and Zhu, Yun: Dissecting Momentum in China
https://ssrn.com/abstract=5130681
Abstract:
Why is price momentum absent in China? Since momentum is commonly considered arising from investors’ under-reaction to fundamental news, we decompose monthly stock returns into news-and non-news-driven components and document a news day return continuation along with an offsetting non-news day reversal in China. The non-news day reversal is particularly strong for stocks with high retail ownership, relatively less recent positive news articles, and limits to arbitrage. Evidence on order imbalance suggests that stock returns overshoot on news days due to retail investors’ excessive attention-driven buying demands, and mispricing gets corrected by institutional investors on subsequent non-news days. To avoid this tug-of-war in stock price, we use a signal that directly captures the recent news performance and re-document a momentum-like underreaction to fundamental news in China.

And several interesting free blog posts that have been published during the last 2 weeks:

Front Running in Country ETFs, or How to Spot and Leverage Seasonality

Understanding seasonality in financial markets requires recognizing how predictable return patterns can be influenced by investor behavior. One underexplored aspect of this is the impact of front-running—where traders anticipate seasonal trends and act early, shifting returns forward in time. We have already explored seasonality front-running in commodities, stock sectors, and crisis hedge portfolios. Our new research examines whether this phenomenon extends to country ETFs, an asset class where seasonality has been less studied. By applying a front-running strategy to a dataset of country ETFs, we identify opportunities to capitalize on seasonal effects before they fully materialize. Our findings indicate that pre-seasonality drift is strongest in commodities but remains present in country ETFs, offering a potential edge in portfolio construction. Ultimately, our study highlights how front-running seasonality can enhance ETF investing, providing an additional layer of market timing beyond traditional trend-following approaches.

Navigating Market Turmoil with Quantpedia Tools: A Rational Guide for Portfolio Management

The recent imposition of sweeping global tariffs by President Donald Trump has triggered a sharp and sudden selloff across global equity markets. In times like these, it’s natural for panic to set in. However, as quantitative investors, our strength lies in data-driven decision-making, risk management, and maintaining discipline when others lose theirs.

Rather than reacting emotionally, the prudent course of action is to reassess the robustness of our portfolios. Are we diversified across uncorrelated strategies? Do we have components in place that act as hedges during market crises? Fortunately, the tools provided by Quantpedia can help investors, traders, and portfolio managers identify, test, and deploy crisis-resilient strategies in a structured and evidence-based manner.