New strategies:
#172 – Cold IPOs Effect
Period of rebalancing: Monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1981 – 2008
Indicative performance: 24.57%
Estimated volatility: not stated
Source paper:
Bakke: 'Cold' IPOs or Hidden Gems? On the Medium-Run Performance of IPOs
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2018808
Abstract:
Over a third of Initial Public Offerings (IPOs) listing on NYSE, AMEX and NASDAQ from 1981 through 2008 accepted offer prices on or below the minimum of their initial price range. This striking number of large discounts has been given no attention in the extant IPO literature. By contrast the equally large fraction of "hot" IPOs issuing at offer prices on or above the issuers best case offer price has left behind a vast number of theories and studies. I argue that issuers are only willing to accept such discounts if the expected returns on funds raised are exceptional, and make up for the foregone assets-in-place. This is a straight forward interpretation of the Myers & Majluf (1984) framework.
If the low demand for allocations in these "cold" IPOs are a result of individual investors bounded rationality (Miller,1977; Barber & Odean,2007; Odean,1999), then abnormal returns will be observed as the market corrects. Using a sample of more than 5000 IPOs, I document significant and robust abnormal returns up towards 5% (excluding Initial Day Returns) during the first months of trading. These positive abnormal returns are strong and persistent both in the event and calendar time analysis, and are greater and more persistent if general market conditions are strong, which supports a bounded rationality explanation.
Brav & Gompers (1997), Brav et al. (2000), Eckbo, Masulis & Norli (2000) and Eckbo & Norli (2004) show using large-sample evidence that the long-run underperformance reported by Ritter (1991) and Loughran & Ritter (1995) can be explained by the general findings of Fama & French (1992), and tends to be mostly related to small growth stock. None of my finding contradict these findings, and as the length of the holding periods increase my findings are similar to these. That said for short holding periods abnormal returns are found, which is consistent with a bounded rationality explanation.
#173 – Volatility Term Structure Predicts Option Returns
Period of rebalancing: Monthly
Markets traded: equities
Instruments used for trading: options
Complexity: Very complex strategy
Bactest period: 1996 – 2007
Indicative performance: 19.56%
Estimated volatility: 21.13%
Source paper:
Vasquez: Volatility Term Structure and the Cross-Section of Option Returns
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1944298
Abstract:
The slope of the volatility term structure strongly predicts the cross section of future option returns. I rank stocks based on the slope of the volatility term structure and analyze the returns on five different option trading strategies. Option portfolios with high slopes of the volatility term structure outperform option portfolios with low slopes of the volatility term structure by an economically and statistically significant amount. For example, the straddle portfolio exhibiting the steepest slope of volatility term-structure outperforms the straddle portfolio with the least pronounced slope by 27.1% per month with a t-statistic of 9.06. The results are extremely robust to different empirical setups and are not explained by the usual risk factors. These findings are consistent with the expectations hypothesis that states that the shape of the volatility term structure should predict future volatility.
New research papers related to existing strategies:
#12 – Pairs Trading with Stocks
Jacobs, Weber: Losing Sight of the Trees for the Forest? Pairs Trading and Attention Shifts
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2023539
Abstract:
This paper tests asset pricing implications of the investor attention shift hypothesis proposed in recent theoretical work. Our objective is to directly assess how the dynamics of investor inattention affect the relative pricing efficiency of linked assets. We create a novel proxy for investor distraction in the time series and explore its impact in a promising and so far widely neglected setup: Stock pairs trading (Gatev(2006)), a popular proprietary relative value arbitrage approach. Relying on almost 50 years of daily data for the US stock market as well as on evidence from eight major international stock markets, we provide broad and robust evidence for substantial distraction effects. For instance, the average one-month return on long-short US stock pairs that open on high distraction days is about twice as high as the return on pairs that open on low distraction days. A number of conceptually quite diverse tests further lend support to the idea of time-varying investor attention being an important source of friction in financial markets.
