New strategy:
#190 – Put-Call Spread Predicts Earnings Announcement Returns
Period of rebalancing: Daily
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1996 – 2008
Indicative performance: 98.35%
Estimated volatility: 34.25%
Source paper:
Atilgan: Deviations from Put-Call Parity and Earnings Announcement Returns
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1512046
Abstract:
Prior research documents that deviations from put-call parity can predict stock returns. If the trading activity of informed investors is an important driver of deviations from put-call parity, then the predictability of stock returns should be more pronounced during major information events. This paper investigates whether the predictability of equity returns by deviations from put-call parity is stronger during earnings announcement periods. These deviations are measured by the implied volatility spreads between pairs of matched put and call options. During a two-day earnings announcement window, the abnormal returns to a portfolio that buys stocks with relatively expensive call options is about 2 percent greater than the abnormal returns to a portfolio that buys stocks with relatively expensive put options. This result is robust after (i) measuring deviations from put-call parity in alternative ways, (ii) using value-weighted portfolio returns, and (iii) controlling for contemporaneous and lagged risk factors and lagged stock returns. The degree of announcement return predictability is stronger when (i) deviations from put-call parity are measured using more liquid options, (ii) information environment is more asymmetric, and (iii) stock liquidity is low.
New research papers related to existing strategies:
#5 – FX Carry Trade
Mayer: Forward Bias Trading in Emerging Markets
http://www.efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS/2010-Aarhus/EFMA2010_0136_fullpaper.pdf
Abstract:
This paper investigates the returns to forward bias-trading in dynamic multi–currency strategies in order to empirically assess the limits to speculation hypothesis in foreign exchange markets. The results suggest that bias–trading strategies allow for economically significant excess returns, represent attractive diversification devices, and contain low downside risk. Furthermore, enriching carry–trade portfolios with emerging market currencies results in large diversification gains. Overall, the findings are in line with the widespread use of bias– trading strategies among market professionals and challenge the concept of limits to speculation as an explanation for the forward bias puzzle.
#14 – Momentum Effect in Stocks
Barroso, Santa-Clara: Managing the Risk of Momentum
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2041429
Abstract:
Compared to the market, value or size risk factors, momentum has offered investors the highest Sharpe ratio. However, momentum has also had the worst crashes, making the strategy unappealing to investors with reasonable risk aversion. We find that the risk of momentum is highly variable over time and quite predictable. The major source of predictability does not come from systematic risk but from specific risk. Managing this time-varying risk virtually eliminates crashes and nearly doubles the Sharpe ratio of the momentum strategy. Risk-managed momentum is a much greater puzzle than the original version.
#31 – Market Seasonality Effect in World Equity Indexes
Dumitriu, Stefanescu, Nistor: The Halloween Effect During Quiet and Turbulent Times
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2043757
Abstract:
The Halloween Effect is one of the main calendar anomalies used to challenge the Efficient Market Hypothesis. It consists in significant differences between the stock returns from two distinct periods of a year: November – April and October – May. In the last decades empirical researches revealed the decline of some important calendar anomalies from the stock markets around the world. Sometimes, such changes were caused by the passing from quiet to turbulent stages of the financial markets. In this paper we investigate the Halloween Effect presence on the stock markets from a group of 28 countries for a period of time between January 2000 and December 2011. We find that geographical position has a major influence on the Halloween Effect intensity. We also find some differences between the emerging markets and the advanced financial markets. We analyze the Halloween Effect for two periods of time: the first, from January 2000 to December 2006, corresponding to a relative quiet evolution and the second, from January 2007 to December 2011, corresponding to a turbulent evolution. The results reveal, for many stock markets, major changes between the first period of time and the second one.
