New strategies:
#225 – Improved Merger Arbitrage
Period of rebalancing: Monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1965 – 2009
Indicative performance: 19.14%
Estimated volatility: not stated
Source paper:
Giglio, Shue: No News is News: Do Markets Underreact to Nothing?
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2139564
Abstract:
As illustrated in the tale of “the dog that did not bark,” the absence of news and the pure passage of time often contain information. We test whether markets fully incorporate the information content of “no news” using the empirical context of mergers. Following the initial merger announcement, uncertainty relating to merger completion can take many months to be resolved. In the interim, the pure passage of time is informative about the probability of merger completion. For example, once six months have passed after announcement, the probability that the merger will ever complete falls rapidly. We show empirically that the variation in hazard rates of completion during the 12 months after announcement strongly predicts returns. This contradicts a model of rational markets, and supports a limited attention model in which markets underreact to no news. We also show that our findings cannot be explained by event time variation in systematic risk, downside risk, or idiosyncratic risk. Specifically, we use an underreaction model to construct a trading strategy that invests in deals during event windows when completion hazard rates are high. Controlling for risk, our strategy outperforms a strategy that invests in deals when completion hazard rates are low by 100 basis points per month.
#226 – Insiders' Silence
Period of rebalancing: Yearly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1992 – 2009
Indicative performance: 7.30%
Estimated volatility: not stated
Source paper:
Gao, Ma: The Sound of Silence: What Do We Know When Insiders Do Not Trade?
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2167998
Abstract:
We examine the phenomenon of insider silence, periods when corporate insiders do not trade. Our evidence strongly supports the jeopardy hypothesis that regulations inhibit insiders from trading on extreme information, implying a relation between insider silence and extreme future returns. First, insiders of merger targets refrain from buying in the months before the merger announcement, and insiders of bankruptcy firms refrain from selling before the bankruptcy filing. Second, among firms that are likely to have bad news, insider silence predicts significant negative future returns, which are even lower than when insiders net sell. Further, the negative information in insider silence is gradually incorporated into stock prices, and a significant portion of it is released around quarterly earnings announcements. Finally, the price inefficiency due to insider silence is pervasive, and market frictions make it worse.
