New strategy:
#216 – Active Collar Strategy
Period of rebalancing: lMonthy
Markets traded: equities, options
Instruments used for trading: options, ETFs, funds
Complexity: Complex strategy
Bactest period: 1999 – 2010
Indicative performance: 12.52%
Estimated volatility: 11.34%
Source paper:
Szado, Schneeweis: An Update of “Loosening Your Collar: Alternative Implementations of QQQ Collars”: Credit Crisis and Out-of-Sample Performance
http://www.asx.com.au/documents/products/CISDM_QQQActive_Full.pdf
Abstract:
This study provides an update to Szado and Schneeweis [2010]. The original study covered the period from March 1999 through May 2009. This updated study extends the period of analysis through September 2010. The credit crisis and the associated decline in equity markets rekindled new interest in option based equity collars and in protective strategies in general. In this paper we consider the performance of passive and active implementations of the collar strategy on the QQQ ETF as well as on a sample small cap equity mutual fund. As expected, the results of the analysis show that a passive collar is most effective (relative to a long underlying position) in declining markets and less effective in rising markets. This study also considers a more active implementation of the collar strategy. Rather than simply applying a set of fixed rules as for the passive collar, in the active collar adjusted strategy, we apply a set of rules which adapt the collar to varying economic and market conditions. This approach is similar to applying a set of tactical asset allocation rules to a set of investments. There are of course an unlimited number of conditioning factors that can be used to determine the strategy implementation. In this paper, for purposes of presentation, we combine three conditioning factors that have been suggested in academic literature (momentum, volatility, and a compound macroeconomic factor (unemployment and business cycle)) to generate a dynamic collar adjusted trading strategy. For the period of analysis, the active collar adjustment strategy tends to outperform the passive collar both in-sample as well as out-of-sample. Judgments as to the particular benefits of the passive and active collar strategies are, of course, dependent on the risk tolerance of the individual investor.
New research papers related to existing strategies:
#31 – Market Seasonality Effect in World Equity Indexes
Jacobsen, Zhang: The Halloween Indicator: Everywhere and All the Time
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2154873
Abstract:
We use all available stock market indices for all 108 stock markets and for all time periods to study the ‘Halloween indicator’ or ‘Sell-in-May’effect. In total 55,425 monthly observations over 319 years show winter returns – November through April – are 4.52% (t-value 9.69) higher than summer returns. The effect is increasing in strength: The average difference between November-April and May-October returns is 6.25% over the past 50 years. A Sell-in-May trading strategy beats the market more than 80% of the time over 5 year horizons. The data allows us to address a number of (methodological) issues that have been raised with respect to the effect.
#137 – Trendfollowing in Futures Markets
Metghalchi, Chang, Hu: Technical Trading Rules for NASDAQ Composite Index
http://www.eurojournals.com/IRJFE_73_10.pdf
Abstract:
This paper tests moving average technical trading rules for the NASDAQ Composite Index. Our results indicate that moving average rules indeed have predictive power and could discern recurring-price patterns for profitable trading. Moreover, our results support the hypothesis that technical trading rules can outperform the buy-and-hold strategy. Break-even one-way trading costs are estimated to be in the range of 1.11% to 1.90% for various rules over the full sample and in the range of 0.22% to a 3.22% for subperiods. We believe these break-even costs are large compared to recent estimates of actual trading costs, implying profitable trading rules for the NASDAQ Composite Index.
#180 – Simple NAV Arbitrage within Country ETFs
Fulkerson, Jordan: Reading Tomorrow's Newspaper: Predictability in ETF Returns
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2153790
Abstract:
Abstract: We study the persistence of ETF premiums and discounts. Following a day of high or low premiums or discounts over NAV, ETFs tend to maintain a premium or discount for up to five days, though there is some regression to the mean. Premiums also predict distinct patterns of returns in the following day. Overnight returns following a premium have large drops in prices following a high premium, but significantly high returns the next day. Surprisingly, the NAV returns over the next day also tend to be positive. Discounts show a similar, but opposite pattern with smaller magnitudes. We conclude that ETF premiums and discounts have some ability to predict future returns, including the fundamental returns of the underlying assets.
