New strategies:
#204 – Selling Options on Bond ETFs
Period of rebalancing: Monthly
Markets traded: bonds
Instruments used for trading: options
Complexity: Moderately complex strategy
Bactest period: 2003-2007
Indicative performance: 17.44%
Estimated volatility: 18.41%
Source paper:
Simon: An Examination of Long-Term Bond iShare Option Selling Strategies
http://www.efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS/2008-athens/Simon.pdf
Abstract:
This paper examines volatility trades in Lehman Brothers 20+ Year US Treasury Index iShare (TLT) options from July 2003 through May 2007. The results indicate that implied volatility is persistently above actual volatility and that unconditionally selling front contract strangles and straddles and holding for one month is highly profitable after transactions costs. The paper also demonstrates that the profitability of short-term strategies is enhanced when strangles and straddles are sold when implied volatility is high relative to out of sample time series volatility forecasts. Profitability owes both to winning trades outpacing losing trades by 2:1 margins and to profits of winning trades exceeding losses of losing trades, despite the limited return and unlimited risk profiles of short option strategies. A decomposition of the results indicates that most of the profitability can be attributed to theta gains outpacing gamma losses. Risk management strategies such as stop loss strategies detract from the profitability of short term option selling strategies, while take profit orders have only modest favorable effects on the results. Overall, the results demonstrate that TLT option selling strategies offered attractive risk-return tradeoffs over the sample period.
#205 – Switching between Value and Momentum in Stocks
Period of rebalancing: Monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1994 – 2008
Indicative performance: 15.31%
Estimated volatility: 11.40%
Source paper:
Hsieh, Hodnett, van Rensburg: Application Of Tactical Style Allocation For Global Equity Portfolios
http://journals.cluteonline.com/index.php/IBER/article/viewFile/7061/7135
Abstract:
Our earlier study suggests that there exists specific timing for the two prominent investment styles, value and momentum. We extend our prior research to test and evaluate a tactical style allocation (TSA) model based on the weighted least squares (WLS) technique for global equities over the out-of-sample period from 1994 through 2008. Two TSA style-based portfolios are constructed in this research, namely, a portfolio with the risk-free proxy (cash component), the global momentum index and the global value index as its constituents, and a portfolio that is comprised of only the global momentum index and the global value index. The optimized portfolios based on the TSA model outperform the MSCI World Index, the global value index and the global momentum index on a risk-adjusted basis over the examination period. The cash component of the style-based portfolio appears to provide necessary protection during financial market crises. The results of our study support the use of the proposed TSA model to perform active style rotation between value stocks and momentum stocks for global equity portfolios.
New research paper related to existing strategies:
#14 – Momentum Effect in Stocks
Henker, Martens, Huynh: The Vanishing Abnormal Returns of Momentum Strategies and 'Front-Running' Momentum Strategies
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=924522
Abstract:
We find large variations in returns from momentum strategies. Momentum strategies did not earn significant returns during the period of 1993-2004 which was due to their poor performance over the period from 2001-2004. We find that the previously documented large firm momentum effect is sensitive to the momentum strategy examined, and is in our sample driven by the abnormal returns of large Nasdaq stocks. We also evaluate momentum strategies that do not adhere to the end of month portfolio formation universally used in the academic literature. To this end we form portfolios one week prior to the end of month and call them 'front-running' momentum portfolios. Consistent with institutional momentum trading affecting end of month returns and volatility, we find that 'front-running' a momentum strategy generates similar, but less volatile returns than the month-end strategy. Pertinently, the returns of a 'front-running' strategy are consistently less volatile than that of an equivalent month-end strategy.
