New strategies:
#166 – Momentum in FOREX Trading Strategies
Period of rebalancing: Daily
Markets traded: currencies
Instruments used for trading: futures, forwards, swaps
Complexity: Complex strategy
Bactest period: 1975 – 2010
Indicative performance: 9.10%
Estimated volatility: 10.00%
Source paper:
Neely, Weller: Lessons from the Evolution of Foreign Exchange Trading Strategies
http://research.stlouisfed.org/wp/2011/2011-021.pdf
Abstract:
The adaptive markets hypothesis posits that trading strategies evolve as traders adapt their behavior to changing circumstances. This paper studies the evolution of trading strategies for a hypothetical trader who chooses portfolios from foreign exchange (forex) technical rules in major and emerging markets, the carry trade, and U.S. equities. The results show that forex trading alone dramatically outperforms the S&P 500 but there is little gain to coordinating forex and equity strategies, which explains why practitioners consider these tools separately. In addition, a backtesting procedure to choose optimal portfolios does not select carry trade strategies until well into the 1990s, which helps to explain the relatively recent surge in interest in this strategy. Forex trading returns dip significantly in the 1990s but recover by the end of the decade and have greatly outperformed an equity position since 1998. Overall, trading rule returns still exist in forex markets—with substantial stability in the types of rules—though they have migrated to emerging markets to a considerable degree.
#167 – Idiosyncratic Momentum in Stocks
Period of rebalancing: Monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1965 – 2011
Indicative performance: 12.35%
Estimated volatility: 13.25%
Source paper:
Chaves: Eureka! A Momentum Strategy that Also Works in Japan
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1982100
Abstract:
This article explores an alternative definition of momentum that is calculated using the idiosyncratic returns from market regressions. By removing the return component due to market beta exposure, this new definition of momentum reduces the volatility of momentum strategies and generates sizeable four-factor alphas. These results hold in a sample of 21 countries, in addition to U.S. data. Most interestingly, the findings also hold in Japan, where previous studies have failed to find any significant power for traditional momentum strategies.
New research papers related to existing strategies:
#57 – Term Spread Premium
Singal: Term Premium in Interest Rate Futures
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1992153
Abstract:
This paper evaluates returns from capturing term premium using interest rate futures across eight major currencies, with a focus on USD. We show that the implied future yield from interest rate futures tends to overestimate the realized short term interest rate and this premium can be captured by establishing and rolling long positions in futures contracts. This strategy delivered a Sharpe ratio of 0.94 versus 0.48 for Treasuries and 0.36 for S&P over the 23 year back testing period for which data is available. The term premium return is negatively correlated to equity returns and therefore fits well into a portfolio that is long risky assets. Additionally, the rates futures term premium strategy outperforms a long Treasuries strategy both on a standalone risk-adjusted basis and as a combination asset with an equity portfolio.
#77 – Beta Factor in Stocks
#78 – Beta Factor in Country Equity Indexes
Berrada, Messikh, Oderda, Pictet: Beta-Arbitrage Strategies: When Do They Work, and Why?
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1976285
Abstract:
Contrary to what traditional asset pricing would imply, a strategy that bets against beta, i.e. long in low beta stocks and short in high beta stocks, tends to out-perform the market. This puzzling empirical fact can be explained through the concept of relative arbitrage. Considering a market in which diversity is maintained, i.e. no single stock can dominate the entire market, we show that beta-arbitrage strategies out-perform the market portfolio with unit probability in finite time. We use the theoretical decomposition of beta-arbitrage excess return to provide empirical support to our explanation on equity country indices, equity sectors and individual stocks. Finally we show how to construct optimal beta-arbitrage strategies that maximize the expected return relative to a given benchmark.
