New strategies:
#219 – FX Momentum Seasonality
Period of rebalancing: Daily
Markets traded: currencies
Instruments used for trading: futures, CFDs
Complexity: Simple strategy
Bactest period: 1997 – 2007
Indicative performance: 3.50%
Estimated volatility: 10.00%
Source paper:
Harris, Stoja, Yilmaz: Day-of-the-Month Effects in the Performance of Momentum Trading Strategies in the Foreign Exchange Market
http://business-school.exeter.ac.uk/documents/papers/finance/2008/0807.pdf
Abstract:
In this paper, we document a very strong day-of-the-month effect in the performance of momentum strategies in the foreign exchange market. We show that this seasonality in trading strategy performance is attributable to seasonality in the conditional volatility of foreign exchange returns, and in the volatility of conditional volatility. Indeed a two-factor model employing conditional volatility and the volatility of conditional volatility explains as much as 70 percent of the intra-month variation in the Sharpe ratio. We further show that the seasonality in volatility is in turn closely linked to the pattern of US macroeconomic news announcements, which tend to be clustered around certain days of the month.
#220 – Momentum and Trend Following in Global Asset Allocation
Period of rebalancing: Monthly
Markets traded: equities, bonds, commodities, REITs
Instruments used for trading: ETFs
Complexity: Moderately complex strategy
Bactest period: 1994 – 2011
Indicative performance: 12.47%
Estimated volatility: 8.47%
Source paper:
Thomas, Clare, Smith, Seaton: The Trend is Our Friend: Risk Parity, Momentum and Trend Following in Global Asset Allocation
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2126478
Abstract:
We examine the effectiveness of applying a trend following methodology to global asset allocation between equities,bonds,commodities and real estate.The application of trend following offers a substantial improvement in risk-adjusted performance compared to traditional buy-and-hold portfolios. We also find it to be a superior method of asset allocation than risk parity. Momentum and trend following have often been used interchangeably although the former is a relative concept and the latter absolute. By combining the two we find that one can achieve the higher return levels associated with momentum portfolios but with much reduced volatility and drawdowns due to trend following. We observe that a flexible asset allocation strategy that allocates capital to the best performing instruments irrespective of asset class enhances this further.
New research paper related to existing strategy:
#118 – Time Series Momentum Effect
Hurst, Ooi, Pedersen: A Century of Evidence on Trend – Following Investing
http://www.scribd.com/doc/110704069/A-Century-of-Evidence-on-Trend-Following-AQR
Abstract:
We study the performance of trend-following investing across global markets since 1903, extending the existing evidence by more than 80 years. We fnd that trend-following has delivered strong positive returns and realized a low correlation to traditional asset classes each decade for more than a century. We analyze trend-following returns through various economic environments and highlight the diversifcation benefits the strategy has historically provided in equity bear markets.Finally, we evaluate the recent environment for the strategy in the context of these long-term results.
