New strategies:
#437 – Optimalized Subportfolio Momentum
Period of rebalancing: Monthly
Markets traded: equities
Instruments used for trading: ETFs
Complexity: Complex strategy
Bactest period: 1937 – 2017
Indicative performance: 18.80%
Estimated volatility: 22.12%
Source paper:
O’Connor, Michael C., Fund and Subportfolio Momentum
https://ssrn.com/abstract=3364124
Abstract:
The strategy of simply holding stocks of high momentum, high trailing returns, is amazing for the amount of support that it has gotten from normally skeptical academics. But in practice there have been flies in the ointment. Unhedged pure momentum didn’t help at all with the 2007–2008 Lehman Brothers/subprime crash and it would not have helped in 1929 either. Herein momentum is applied to a portfolio of stock funds or of stock-fund-like subportfolios, not stocks. And a simple resort-to-cash cure for momentum failures during panics is speciï¬ed and tested using a new kind of “alpha” whose conï¬dence interval is calculable despite the mixed-distribution character of the resultant portfolio returns. A walk-forward procedure is conducted that is more of a simulation than an abstract exercise in mathematical statistics, that provides a dynamically-optimized momentum strategy that would be adaptive to secular changes in the marketplace. That the optimal form of the momentum measure for a portfolio of funds or subportfolios is critically different from a popular form that works with stocks is demonstrated. And it is discovered that if volatility suppression is emphasized and there is a policy of resorting to cash when momentum falters then the optimal target number of funds or subportfolios to hold is a considerable fraction of the number of candidates.
#438 – US Equity Tail Risk and Currency Risk Premia
Period of rebalancing: Monthly
Markets traded: currencies
Instruments used for trading: CFDs, futures, forwards
Complexity: Complex strategy
Bactest period: 1989 – 2018
Indicative performance: 6.13%
Estimated volatility: 8.12%
Source paper:
Fan, Zhenzhen and Londono-Yarce, Juan-Miguel and Xiao, Xiao: US Equity Tail Risk and Currency Risk Premia
https://ssrn.com/abstract=3399980
Abstract:
We find that a US equity tail risk factor constructed from out-of-the-money S&P 500 put option prices explains the cross-sectional variation of currency excess returns. Currencies highly exposed to this factor offer a low currency risk premium because they appreciate when US tail risk increases. In a reduced-form model, we show that country-specific tail risk factors are priced in the cross section of currency returns only if they contain a global risk component. Motivated by the intuition from the model and by our empirical results, we construct a novel proxy for a global tail risk factor by buying currencies with high US equity tail beta and shorting currencies with low US tail beta. This factor, along with the dollar risk factor, explains a large portion of the cross-sectional variation in the currency carry and momentum portfolios and outperforms other models widely used in the literature.
New research papers related to existing strategies:
#17 – Momentum Effect in Anomalies/Trading Systems
Zaremba, Shemer: Is there Momentum in Factor Premia? Evidence from International Equity Markets
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3332927
Abstract:
This study examines the momentum effect in the returns of factor premia representing a broad set of stock market strategies. Using cross-sectional and time-series tests, we investigate the performance persistence of market, value, size, momentum, low-risk, and quality premia within a sample of 24 international equity markets for the years 1990–2016. We provide strong evidence that the top performing factors continue to outperform the worst performing factors both in individual equity markets and in the cross-country framework. The momentum in factor premia is largely explained by the classic stock-level momentum effect.
#144 – Trendfollowing Effect in Stocks
#227 – Trend Factor within Stocks
Liu, Zhou, Zhu: Trend Factor in China
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3402038
Abstract:
We propose a 4-factor model by adding an additional trend factor to Liu, Stambaugh and Yuan’s (2018; LSY-3) 3-factor model: market, size and value. Since individual investors contribute about 80% of the trading volume in China, the trend factor captures well the resulting important price and volume trends, and has a monthly Sharpe ratio of 0.48, much greater than those of the market (0.11), size (0.19) and value (0.28). The proposed 4-factor model explains all reported Chinese anomalies, including turnover and reversal unexplained previously by LSY-3. Moreover, the model explains well mutual fund returns, working as an analogue of Carhart 4-factor model in China.
And two additional related research papers have been included into existing free strategy reviews during last 2 weeks:
#33 – Post-Earnings Announcement Effect
Sojka: 50 Years in PEAD Research
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3281679
Abstract:
Analysing earning’s predictive power on stock returns was in the heart of academic research since late 60’s. First introduced to academic world in 1967 during seminar “Analysis of Security Prices” by Chicago University Professors Ray Ball and Philip Brown. In the next four decades was extensively analysed by many academics and is now a well-documented anomaly and is referred to as Post Earnings Announcement Drift (PEAD). This phenomenon is still at the centre of academic research because it stands at odds with efficient market hypothesis which assumes that all information is instantaneously reflected in stock prices. Professional investors are also closely looking at PEAD as it implies that it is easy to beat the market average by simply ranking stocks based on their earnings surprise and investing in the top decile, quintile or quartile and shorting the bottom part. Academic evidence shows that this strategy produces an abnormal return of somewhere between 2.6% and 9.37% per quarter, according to various authors. In this paper I will present existing evidence supporting and contradicting “PEAD”, the history of academic research in that field and various techniques used to verify the phenomenon. The paper is organised as follows: first the history of the PEAD academic research is presented, in the second more recent evidence and research techniques used by authors are presented and finally conclusions and various critics of PEAD are shown.
A new research paper related to all equity factor strategies …
Zaremba, Maydybura, Czapkiewicz, Arnaut: Explaining Equity Anomalies In Frontier Markets: A Horserace of Factor Pricing Models
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3378785
Abstract:
We are the first to compare the explanatory power of the major empirical asset pricing models over equity anomalies in the frontier markets. We replicate over 160 stock market anomalies in 23 frontier countries for years 1996–2017, and evaluate their performance with the factor models. The Carhart’s (1997) four-factor model outperforms both the recent Fama and French (2015) five-factor model and the q-model by Hou, Xue, and Zhang (2015). Its superiority is driven by the ability to explain the momentum-related anomalies. Inclusion of additional profitability and investment factors lead to no further major improvement in the performance. Nonetheless, none of the models is able to fully explain the abnormal returns on all of the anomaly portfolios.
