New strategies:
#176 – Shorting Stocks on the Option Expiration Day
Period of rebalancing: Daily
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1996 – 2006
Indicative performance: 18.86%
Estimated volatility: 24.69%
Source paper:
Chiang: Stock Returns on Option Expiration Dates
http://www.webmeets.com/files/papers/ESWC/2010/1300/WorldCongress.pdf
Abstract:
This paper documents striking evidence that stocks with a suf ciently large amount of deeply in-the-money call options earn signi cantly lower returns on option expiration dates, with a drop in average daily returns of up to 1 percentage point. This price movement of stocks is followed by a short-term reversal. On option expiration dates, option holders who exercise deeply in-the-money call options have an increasing demand for immediacy to sell the acquired stocks in the stock market. I offer an explanation of why this is not offset by option writers’ purchases, based on the premise that most written calls are covered either at inception or prior to maturity. When exercised open interest is sufficiently large compared to the daily trading volume of the underlying stocks, the resulting selling pressure in the stock market leads to a fall in expiration-date returns of the underlying stocks.
#177 – Term Structure of CDS Predicts Stock Returns
Period of rebalancing: Monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 2002 – 2009
Indicative performance: 27.57%
Estimated volatility: 23.84%
Source paper:
Han, Zhou: Term Structure of Credit Default Swap Spreads and Cross-Section of Stock Returns
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1735162
Abstract:
The slope of a firm's term structure of credit default swap (CDS) spreads (five-year spread minus one-year spread) negatively predicts future stock returns. Stocks with low CDS slope on average outperform stocks with high CDS slope by over 1% each month for the next six months. Our result can not be explained by standard risk factors, stock characteristics, default risk measures or changes in CDS spreads. We find that CDS slope positively predicts future changes in CDS spreads, but the information content of CDS slope only slowly gets incorporated into stock price. CDS slope predicts return mainly for stocks facing high arbitrage costs.
New research papers related to existing strategies:
#54 – Momentum and State of Market (Sentiment) Filters
Min, Kim: Momentum Profits and Macroeconomic States: Is Winner Riskier than Loser?
http://www.apjfs.org/conference/2009/cafm2009/04_02_Momentum%20Profits.pdf
Abstract:
We examine whether momentum profits and macroeconomic risk are related. We find that momentum strategy generates economically large negative profits in bad economic states, while positive profits in good economic states, when we define states of nature based on the expected market risk premium, instead of on the realized market excess return. Our findings suggest that time variation in momentum strategy is linked to variations in macroeconomic risk. Thus, our results are consistent with risk-based explanations of momentum.
#174 – Institutional Ownership Effect
Choi, Jin, Yan: What Does Stock Ownership Breadth Measure?
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1571694
Abstract:
Using holdings data on a representative sample of all Shanghai Stock Exchange investors, we show that increases in the fraction of market participants who own a stock predict low returns: highest change quintile stocks underperform lowest quintile stocks by 23 percent per year. This is consistent with ownership breadth primarily reflecting popularity among noise traders rather than the amount of negative information excluded from prices by short-sales constraints. But stocks in the top decile of wealth-weighted institutional breadth change outperform the bottom decile by 8 percent per year, suggesting that breadth measured among sophisticated institutional investors who cannot short does reflect missing negative information. The profitability of institutional trades against retail investors is almost entirely explained by their correlations with retail and institutional breadth changes.
