New strategies:
#116 – Insider Trading Combined with Share Repurchases
Period of rebalancing: Quarterly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Simple strategy
Bactest period: 1988-2007
Indicative performance: 16%
Estimated volatility: not stated
Source paper:
Bonaime, Ryngaert: Insider trading and share repurchases: Do insiders and firms trade in the same direction?
http://69.175.2.130/~finman/Turin/Papers/Insider_trading_and_share_repurchases.pdf
Abstract:
Signaling undervaluation is often considered one of the primary motives for repurchasing stock, but many corporate insiders of repurchasing firms do not trade in a fashion consistent with their company’s stock being undervalued. Specifically, we find that net insider buying and net insider selling are observed more frequently in quarters when firms are repurchasing non-trivial amounts of stock than in non-repurchasing quarters. The probability of simultaneous insider sales and company-level buybacks is greatest for larger firms with higher levels of option exercise, higher industry-adjusted market to book ratios, higher returns leading up to the repurchasing quarter and weaker shareholder rights. These results suggest that, in the case where insiders are simultaneously selling company stock, share repurchases are unlikely to be motivated by undervaluation. We calculate long-run abnormal returns for repurchasing firms conditional on the direction of net insider trades, and our findings are consistent with insider trades either validating or negating the undervaluation signal of the share repurchase. Repurchasing firms with concurrent net insider buying experience average buy and hold abnormal returns of 6.16, 2.50, and 1.27 percent during years one, two, and three, respectively, after the repurchasing quarter compared to 0.51, -0.93, and -3.09 percent for repurchasing firms with simultaneous net insider selling.
#117 – Lottery Effect in Stocks
Period of rebalancing: Monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1929-2008
Indicative performance: 13,08%
Estimated volatility: 28,64%
Source paper:
Bali, Cakici, Whitelaw: Maxing Out: Stocks as Lotteries and the Cross-Section of Expected Returns
http://archive.nyu.edu/handle/2451/27871
Abstract:
Motivated by existing evidence of a preference among investors for assets with lottery-like payoffs and that many investors are poorly diversified, we investigate the significance of extreme positive returns in the cross-sectional pricing of stocks. Portfolio-level analyses and firm-level cross-sectional regressions indicate a negative and significant relation between the maximum daily return over the past one month(MAX) and expected stock returns. Average raw and risk-adjusted return differences between stocks in the lowest and highest MAX deciles exceed 1% per month. These results are robust to controls for size, book-to-market, momentum, short-term reversals, liquidity, and skewness. Of particular interest, including MAX generally subsumes or reverses the puzzling negative relation between returns and idiosyncratic volatility recently documented in Ang et al. (2006, 2008).
New research papers related to existing strategies:
#16 – Mean Reversion Effect in Country Equity Indexes
New related paper:
Spierdijk, Bikker, Van den Hoek: Mean Reversion in International Stock Markets: An Empirical Analysis of the 20th Century
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1947305
Abstract:
This paper analyzes mean reversion in international stock markets during the period 1900-2008, using annual data. Our panel of stock indexes in seventeen developed countries, covering a time span of more than a century, allows us to analyze in detail the dynamics of the mean-reversion process. In the period 1900-2008 it takes stock prices about 13.8 years, on average, to absorb half of a shock. However, using a rolling-window approach we establish large fluctuations in the speed of mean reversion over time. The highest mean reversion speed is found for the period including the Great Depression and the start of World War II. Furthermore, the early years of the Cold War and the period covering the Oil Crisis of 1973, the Energy Crisis of 1979 and Black Monday in 1987 are also characterized by relatively fast mean reversion. Overall, we document half-lives ranging from a minimum of 2.1 years to a maximum of 23.8 years. In a substantial number of time periods no significant mean reversion is found at all, which underlines the fact that the choice of data sample contributes substantially to the evidence in favour of mean reversion. Our results suggest that the speed at which stocks revert to their fundamental value is higher in periods of high economic uncertainty, caused by major economic and political events.
#83 – Pre-Holiday Effect
New related paper:
Bhana: Public holiday share price behaviour on the Johannesburg Stock Exchange
http://www.iassa.co.za/articles/039_win1994_03.pdf
Abstract:
This investigaton evaluatesthe impact of the public holiday effect on the share returns of companies listed on the JSE during the period 1975-1990. On the trading day prior to holidays share advance with disproportionate freqency and show mean returns for the remainding days of the year. Over one-fifth of the total return acruing to the market portfolio over the 1975-1990 period was earned on the nine trading days which fall each year before holiday market closings. The empirical evidence suggests that the pre-holiday return may, in part, be due to the simultaneous movements from "bid" to the "ask" price. The holiday efect appears to be related to the human tendency to bid up share prices prior to market closings for weekdays and holidays.
#115 – Short-Term Residual Reversal
New related paper:
Da, Liu, Schaumburg: Decomposing Short-Term Return Reversal
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1926851
Abstract:
The profit to a standard short-term return reversal strategy can be decomposed analytically into four components: 1) across-industry return momentum, 2) within-industry variation in expected returns, 3) under-reaction to within-industry cash flow news, and 4) a residual. Only the residual component, which isolates reaction to recent “nonfundamental” price changes, is significant and positive in the data. A simple short-term return reversal trading strategy designed to capture the residual component generates a highly significant risk-adjusted return three times the size of the standard reversal strategy during our 1982-2009 sampling period. Our decomposition suggests that short-term return reversal is pervasive, much greater than previously documented, and driven by investor sentiment on the short side and liquidity shocks on the long side.
