New strategies:
#128 – Innovative Efficiency Effect in Stocks
Period of rebalancing: Yearly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1982-2007
Indicative performance: 6.80%
Estimated volatility: 7.00%
Source paper:
Hirshleifer, Hsu, Li: Innovative Efficiency and Stock Returns
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1799675
Abstract:
We find that innovative efficiency (IE), patents or citations scaled by R&D, is a strong positive predictor of future returns after controlling for firm characteristics and risk. The IE-return relation is associated with the loading on a mispricing factor, and the high Sharpe ratio of the Efficient Minus Inefficient (EMI) portfolio suggests that mispricing plays an important role. Further tests based upon attention and uncertainty proxies suggest that limited attention contributes to the effect. The high weight of the EMI portfolio return in the tangency portfolio suggests that IE captures incremental pricing effects relative to well-known factors.
#129 – Dollar Carry Trade
Period of rebalancing: Monthly
Markets traded: currencies
Instruments used for trading: futures, forwards, swaps, CFDs
Complexity: Simple strategy
Bactest period: 1983-2009
Indicative performance: 5.60%
Estimated volatility: 8.53%
Source paper:
Lustig, Roussanov, Verdelhan: Countercyclical Currency Risk Premia and the Dollar Carry Trade
http://www.hbs.edu/units/finance/pdf/Predictability_Oct31_2011.pdf
Abstract:
The dollar carry trade goes long a basket of foreign currencies and short the dollar when the average forward discount for the basket is positive and takes the opposite position when the average forward discount is negative. The returns on the dollar carry trade are uncorrelated with the returns on the high-minus-low global currency carry trade, which is dollar neutral, but the dollar carry trade offers even higher Sharpe ratios. Using a no-arbitrage model of exchange rates, we show that these excess returns compensate U.S. investors for taking on U.S. speciffc risk by shorting the dollar in U.S. recessions, and for taking on global risk by going long in the dollar in bad times. The model implies that countries whose exposures to global shocks differ substantially from the average exhibit much less currency return predictability, a prediction that we show is borne out by the data.
New research papers related to existing strategies:
#8 – FX Momentum
New related paper:
Bianchi, Drew, Polichronis: A Test of Momentum Trading Strategies in Foreign Exchange Markets: Evidence from the G7
http://external-apps.qut.edu.au/business/documents/discussionPapers/2004/DP%20No.%20182%20-%20Drew,%20Biancia,%20Poli.pdf
Abstract:
In this trading strategy study, we ask three questions. First, does momentum exist in foreign exchange markets? Second, what is the impact of transactions costs on excess returns? And, third, can a consolidated trading signal garner excess returns and, if so, what is the source of such returns? Using total return momentum strategies in the foreign exchange markets of the G7 for the period 1980 through 2004, the answers from this study are as follows: we find evidence of momentum; however, such momentum appears transitory, particularly for longer look back periods. As expected, transaction costs have a material negative impact on excess returns. Finally, a consolidated signal garners excess returns; however, a bootstrap simulation finds the source of these returns is a function of autocorrelation.
#14 – Momentum Effect in Stocks
New related paper:
Israel, Moskowitz: How Tax Efficient are Equity Styles?
http://faculty.chicagobooth.edu/tobias.moskowitz/research/How%20Tax%20Efficient%20are%20Passive%20Equity%20Styles—Apr%202011_clean2.pdf
Abstract:
We examine the tax efficiency and after-tax performance of long only equity styles. On an after-tax basis, value and momentum portfolios outperform, and growth underperforms, the market. We find that momentum, despite its higher turnover, is often more tax efficient than value, because it generates substantial short-term losses and lower dividend income. Tax optimization improves the returns to all equity styles, with the biggest improvements accruing to value and momentum styles. However, only momentum allows significant tax minimization without incurring significant style drift. This is because managing gain and loss realization incurs less tracking error than avoiding dividend income and momentum's tax exposure is primarily capital gains, while value and growth's tax exposures are more sensitive to dividends. The effect of taxes across equity styles are magnified within a broader asset allocation framework and in down markets.
