New strategies:
#164 – Short-Term Reversal in Equity Index Futures
Period of rebalancing: Weekly
Markets traded: equities
Instruments used for trading: futures, CFDs, ETFs
Complexity: Simple strategy
Bactest period: 1993-2002
Indicative performance: 29.60%
Estimated volatility: not stated
Source paper:
Chen, Kang, Lien: Contrarian Long-Short Futures Arbitrages and Market Efficiency: Evidence in the Index Futures Markets around the Globe
http://centerforpbbefr.rutgers.edu/2006/Paper%202006/12AS01-046-INT_Index_Futures.pdf
Abstract:
The contrarian long-short futures arbitrages of holding for H days after simultaneously selling winners and buying losers in the past E days are analyzed in the 39 index futures markets around the globe in the 1992-2002 period. The excess normalized profits of {5,5} long-short futures arbitrages were statistically significant in all markets except the US index futures market. While these were particularly significant on Thursdays/Fridays in the September spot months, they were mainly driven by return reversals and bear-market conditions. Our findings therefore suggest, among other things, that the long-short futures arbitrages may persist to be profitable in most index futures markets.
#165 – Demographic Changes Predict Stock Market Returns
Period of rebalancing: Yearly
Markets traded: equities
Instruments used for trading: ETFs
Complexity: Complex strategy
Bactest period: 1970-2000
Indicative performance: 8.93%
Estimated volatility: not stated
Source paper:
Ang, Maddaloni: Do Demographic Changes Affect Risk Premiums? Evidence from International Data
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=406049
Abstract:
We examine the link between equity risk premiums and demographic changes using a very long sample over the twentieth century for the US, Japan, UK, Germany and France, and a shorter sample covering the last third of the twentieth century for fifteen countries. We find that demographic variables significantly predict excess returns internationally. However, the demographic predictability found in the US by past studies for the average age of the population does not extend to other countries. Pooling international data, we find that, on average, faster growth in the fraction of retired persons significantly decreases risk premiums. This demographic predictability of risk premiums is strongest in countries with well-developed social security systems and lesser-developed financial markets.
New research paper related to existing strategies:
#20 – Volatility Risk Premium Effect
Hodges, Tompkins, Ziemba: The Favorite/Long-Shot Bias in S&P 500 and Ftse 100 Index Futures Options: The Return to Bets and the Cost of Insurance
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=424421
Abstract:
This paper examines whether the favorite/long-shot bias that has been found in gambling markets (particularly horse racing) applies to options markets. We investigate this for the S&P 500 futures, the FTSE 100 futures and the British Pound/US Dollar futures for the seventeen plus years from March 1985 to September 2002. Calls on the FTSE 100 with three months to expiration display a relationship between probabilities and average returns that are very similar to the favorite/long-shot bias in horse racing markets pointed out by Ali (1979), Snyder (1978) and Ziemba & Hausch (1986). There are slight profits from deep in-the-money calls on the S&P 500 futures and increasingly greater losses as the call options are out-of-the-money. For 3 month calls on the FTSE 100 futures, the favorite bias is not found, but a significant long-shot bias has existed for the deepest out of the money options. For call options in both markets, for the one month horizon, only a longshot bias is found. For the put options on both markets, and for both 3 month and 1 month horizons, we find evidence consistent with the hypothesis that investors tend to overpay for all put options as an expected cost of insurance. The patterns of average returns is analogous to the favorite/longshot bias in racing markets. For options on the British Pound/US Dollar, there does not appear to be any systematic favorite/long-shot bias for either calls or puts.
