New strategy:
#127 – Accrual Anomaly ver.2
Period of rebalancing: Yearly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1989-2008
Indicative performance: 11.68%
Estimated volatility: 13.10%
Source paper:
Hafzalla, Lundholm, Van Winkle: Percent Accruals
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1558464
Abstract:
We document how the effectiveness of an accruals-based trading strategy changes with the benchmark used to identify an extreme accrual. We measure “percent accruals” as accruals scaled by earnings, rather than total assets, and show that this seemingly small change produces a radically different sort of the data. We find that a trading strategy based on percent accruals yields significantly larger annual hedge returns than the traditional accruals measure, and does so mostly by improving the long position in low accrual stocks. The hedge returns are also significant in all but the lowest quintile of arbitrage risk. We show that percent accruals more effectively select firms where the difference between sophisticated and naïve forecasts are the most extreme. As such, our results are consistent with the earnings fixation hypothesis and are inconsistent with some alternative explanations for the accrual anomaly. We also find that percent accruals are not dependent on the presence or absence of special items and identify misvalued stocks just as well for loss firms as for gain firms, in contrast to the traditional accruals measure.
New research papers related to existing strategies:
#3 -Sector Momentum – Rotational System
#15 – Momentum Effect in Country Equity Indexes
New related paper:
Andreu, Swinkels, Tjong-A-Tjoe: Can exchange traded funds be used to exploit country and industry momentum?
http://www.efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS/2011-Braga/papers/0166.pdf
Abstract:
There is overwhelming empirical evidence on the existence of country and industry momentum effects. This line of research suggests that investors who buy countries and industries with relatively high past returns and sell countries and industries with relatively low past returns will earn positive risk-adjusted returns. These studies focus on country and industry indexes that cannot be traded directly by investors. This warrants the question whether country and industry momentum effects can really be exploited by investors or are illusionary in nature. We analyze the profitability of country and industry momentum strategies using actual price data on Exchange Traded Funds. We find that, over the sample periods that these ETFs were traded, an investor would have been able to exploit country and industry momentum strategies with an excess return of about 5% per annum. The daily average bid-ask spreads on ETFs are substantially below the implied break-even transaction costs levels. Hence, we conclude that investors that are not willing or able to trade individual stocks are able to use ETFs to benefit from momentum effects in country and industry portfolios.
#5 – FX Carry Trade
New related paper:
Acemoglu, Rogoff, Woodford: Carry Trades and Currency Crashes
http://www.nber.org/chapters/c7288.pdf
Abstract:
A “naive” investment strategy that chases high yields around the world works remarkably well in currency markets. This strategy is typically referred to as the carry trade in foreign exchange, and it has consistently been very profitable over the last 3 decades.
#125 – 12 Month Cycle in Cross-Section of Stocks Returns
New related paper:
Heston, Sadka: Common Patterns of Predictability in the Cross-Section of International Stock Returns
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=971141
Abstract:
This paper studies the performance of international stock strategies based on historical returns. Stocks that outperform the local market in a particular month continue to outperform the local market in future years in that same calendar month. This effect lasts for 10 years and the same pattern appears in Canada, Japan, and twelve European countries. This return pattern is independent of country, currency effects, and market capitalization. These strategies are not highly correlated across countries; this indicates they do not reflect pervasive international risk. Instead this common seasonal structure in international stocks suggests countries share similar segmented return mechanisms.
