New strategies:
#232 – Debt Growth Effect Combined with Asset Growth Effect
Period of rebalancing: Yearly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1968 – 2010
Indicative performance: 11.35%
Estimated volatility: 17.02%
Source paper:
Brennan, Kraft: Financing Asset Growth
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2160017
Abstract:
We document the existence of a debt anomaly that is in addition to the asset growth anomaly: for a given asset growth rate, firms that issue more debt, as well as firms that retire more debt, have lower stock returns in the 12 months starting 6 months after the calendar year of asset growth. Exploring the reasons for debt issuance, we find that managers of firms for which analyst expectations are more over-optimistic, which suffer from declining investment profitability, and whose earnings-price ratios are relatively high are inclined to rely more heavily on debt financing. On the other hand, firms that retire more debt for a given asset growth rate tend to have improving profitability but to be over-priced. We also find that the financing decision is influenced by the prior debt ratio, the asset growth rate, profitability, and CEO pay sensitivity. We interpret our results in terms of managerial incentives, signaling, and market timing.
#233 – Using Straddles to Trade on Earnings Announcements
Period of rebalancing: Daily
Markets traded: equities
Instruments used for trading: options
Complexity: Very complex strategy
Bactest period: 1996-2010
Indicative performance: 40.75%
Estimated volatility: 64.67%
Source paper:
Xing, Zhang: Anticipating Uncertainty: Straddles Around Earnings Announcements
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2204549
Abstract:
On average, straddles on individual stocks earn significantly negative returns: daily holding period return is -0.19% and weekly holding period return is -2.09%. In sharp contrast, straddle returns are significantly positive around earnings announcements: average at-the-money straddle returns from one day before earnings announcement to the earnings announcement date yields a highly significant 2.3% return. The positive straddle returns around earnings announcements are robust to different stock and option characteristics. This finding suggests that investors underestimate the magnitude of uncertainty during the earnings announcement period, consistent with the cognitive bias “conservatism.” Furthermore, we find the underestimation of uncertainty is more pronounced for smaller firms, firms with less analyst coverage, higher past jump frequency, higher kurtosis and more volatile past earnings surprises. This supports the notion that when there is more noise in the data, it is more likely for investors to display “conservatism.”
New research papers related to existing strategies:
#77 – Beta Factor in Stocks
#78 – Beta Factor in Country Equity Indexes
Frazzini, Pedersen: Embedded Leverage
http://www.econ.yale.edu/~af227/pdf/Embedded%20Leverage%20-%20Frazzini%20and%20Pedersen.pdf
Abstract:
Many financial instruments are designed with embedded leverage such as options and leveraged exchange traded funds (ETFs). Embedded leverage alleviates investors’ leverage constraints and, therefore, we hypothesize that embedded leverage lowers required returns. Consistent with this hypothesis, we find that asset classes with embedded leverage offer low risk-adjusted returns and, in the cross-section, higher embedded leverage is associated with lower returns. A portfolio which is long low-embedded-leverage securities and short high-embedded-leverage securities earns large abnormal returns, with t-statistics of 8.6 for equity options, 6.3 for index options, and 2.5 for ETFs. We provide extensive robustness tests and discuss the broader implications of embedded leverage for financial economics.
#226 – Insiders' Silence
Ma, Ukhov: What is Common Among Return Anomalies? Evidence from Insider Trading Decisions
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2188653
Abstract:
Conventional wisdom suggests that insiders buy shares on positive, and sell on negative, information. Under regulations of insider trading, however, insiders keep silent while possessing extreme information. We find that this phenomenon of insider silence is systematically related to a broad set of anomalies, particularly in the short legs. Specifically, among firms in the short legs, those whose insiders kept silent in the past experience significant negative future returns, which are even lower than when insiders net sold. On average, insider silence accounts for 64% of the short-leg abnormal returns. Our paper provides quantitative evidence of mispricing for return anomalies.
