New strategies:
#132 – Dynamic Commodity Timing Strategy
Period of rebalancing: Monthly
Markets traded: commodities
Instruments used for trading: ETFs, CFDs, futures
Complexity: Complex strategy
Bactest period: 1992-2003
Indicative performance: 11.80%
Estimated volatility: 18.00%
Source paper:
Vrugt, Bauer, Molenaar, Steenkamp: Dynamic Commodity Timing Strategies
http://www.fdewb.unimaas.nl/finance/WorkingPapers/04/wp04_012.pdf
Abstract:
Recent research documents that commodities are good diversifiers in traditional investment portfolios: overall portfolio risk is reduced while less than proportional return is sacrificed. These studies generally find a relatively high volatility in commodity returns, which implies a huge potential for tactical strategies. In this paper we investigate timing strategies with commodity futures using factors directly related to the stance of the business cycle, the monetary environment and the sentiment of the market. We use a dynamic model selection procedure in the spirit of the recursive modeling approach of Pesaran and Timmermann [1995]. However, instead of using in-sample model selection criteria, we build on the extensions of Bauer, Derwall and Molenaar [2004] by introducing an out-of-sample model training period to select optimal models. The best models from this training period are used to generate forecasts in a subsequent trading period. Our results show that the variation in commodity future returns is sufficiently predictable to be exploited by a realistic timing strategy.
New research papers related to existing strategies:
#5 – FX Carry Trade
#8 – FX Momentum
#9 – FX Value – PPP Strategy
New related paper:
Kroencke, Schindler, Schrimpf: International Diversification Benefits with Foreign Exchange Investment Styles
http://ftp.zew.de/pub/zew-docs/dp/dp11028.pdf
Abstract:
Style-based investments and their role for portfolio allocation have been widely studied by researchers in stock markets. By contrast, there exists considerably less knowledge about the portfolio implications of style investing in foreign exchange markets. Indeed, style-based investing in foreign exchange markets is nowadays very popular and arguably accounts for a considerable fraction in trading volumes in foreign exchange markets. This study aims at providing a better understanding of the characteristics and behavior of stylebased foreign exchange investments in a portfolio context. We provide a comprehensive treatment of the most popular foreign exchange investment styles over the period from January 1985 to December 2009. We go beyond the well known carry trade strategy and investigate further foreign exchange investment styles, namely foreign exchange momentum strategies and foreign exchange value strategies. We use traditional mean-variance spanning tests and recently proposed multivariate stochastic dominance tests to assess portfolio investment opportunities from foreign exchange investment styles. We nd statistically signi cant and economically meaningful improvements through style-based foreign exchange investments. An internationally oriented stock portfolio augmented with foreign exchange investment styles generates up to 30% higher return per unit of risk within the covered sample period. The documented diversi cation bene ts broadly prevail after accounting for transaction costs due to rebalancing of the style-based portfolios, and also hold when portfolio allocation is assessed in an out-of-sample framework.
#90 – Pairs Trading with ADRs
New related paper:
Amary, Ottoni: ADR Arbitrage Opportunities for Dummies
http://people.hbs.edu/mdesai/IFM05/AmaryOttoni.pdf
Abstract:
Since an ADR represent an ownership interest in its underlying foreign security, the prices of the ADR and the underlying stock should be the same at all times after adjusting for exchange rates (law of one price). This should be true since, if the price of the ADR is higher than the underlying (after adjusting for exchange rates), an investor would be able to buy it cheaply, convert it back to the underlying stock, and sell it for a higher price in the foreign market. This is what we call an ADR arbitrage, where an investor will arbitrage these differences away and make a riskless profit.
Oftentimes, however, these two prices diverge and the ADR will trade at either a premium or a discount to its underlying stock. Our primary objective with this paper is to understand why these price differentials emerge and analyze whether they represent real riskless arbitrage opportunities. Finally, we will further analyze different stocks/ADRs pairs in India and Brazil to understand if and how an investor could profit from these price differentials.
#99 – FX Carry Trade Combined with PPP (Value) Strategy
New related paper:
Gyntelberg, Schrimpf: FX strategies in periods of distress
http://www.bis.org/publ/qtrpdf/r_qt1112e.pdf
Abstract:
This article presents an overview of widely practised short-term multicurrency investment strategies such as carry trade, momentum and term spread strategies. We provide evidence on their downside risk properties and illustrate their performance over historical episodes of financial market turmoil. We show that the strategies exhibit substantial tail risks and that they do not perform uniformly during distress periods in global markets. Interestingly, equity market investments feature even greater downside risk.
