New strategies:
#247 – Value Effect within Countries v2
Period of rebalancing: monthly
Markets traded: equities
Instruments used for trading: ETFs, futures
Complexity: Complex strategy
Bactest period: 2000 – 2013
Indicative performance: 6.80%
Estimated volatility: 9.21%
Source paper:
Zaremba: Macro Model for Macro Funds
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2372959
Abstract:
The paper concentrates on country-level value and size premiums. It contributes to academic literature in three ways. First, I provide fresh evidence that the value and size effects may be useful in explaining the cross-sectional variation in country returns. The computations are based on a broad sample of 66 countries in years 2000-2013. Second, I document that the country-level value and size effects are indifferent to currency conversions. Finally, I introduce an alternative macro-level Fama-French model, which, contrary to its prototype, employs country-based factors. I show that applying this modification makes the model more successful in evaluation of funds with global investment mandate than the standard CAPM and FF models.
New research papers related to existing strategies:
#97 – Half-Day Reversal
Kudryavtsev: Overnight Stock Price Reversals
http://www.degruyter.com/view/j/jasf.2012.3.issue-2/v10259-012-0011-1/v10259-012-0011-1.xml
Abstract:
In present study, I explore the dynamics of stock price reversals. In particular, I try to shed light on the overnight reversals, that is, on the price reversals between the end of a trading day and the opening session of the next trading day. To account for the "end-of-the-day" price moves, for each of the stocks currently making up the Dow Jones Industrial Index, I compare, on the daily basis, the high-to-close and the low-to-close price changes, and also compare them to the same day's average and median changes for the total sample of stocks. I document that opening returns tend to be higher following the days with relatively large high-to-close price changes (price decreases at the end of the day), and lower following the days with relatively large low-to-close price changes (price increases at the end of the day). Such "overnight reversals" price behavior seems to contradict the market efficiency. Finally, I construct five portfolios based on the opening trading sessions and involving a long position in the stocks on the days when, according to the "overnight reversals" behavior, their opening returns are expected to be high and a short position in the stocks on the days when their opening returns are expected to be low. All the portfolios are found to yield significantly positive returns, providing an evidence for the practical applicability of the "overnight reversals" pattern in stock prices.
#237 – Dispersion Trading
Driessen, Meanhout, Vilkov: Option-Implied Correlations and the Price of Correlation Risk
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2359380
Abstract:
Motivated by extensive evidence that stock-return correlations are stochastic, we analyze whether the risk of correlation changes (affecting diversification benefits) may be priced. We propose a direct and intuitive test by comparing option-implied correlations between stock returns (obtained by combining index option prices with prices of options on all index components) with realized correlations. Our parsimonious model shows that the substantial gap between average implied (39.5% for S&P500 and 46.0% for DJ30) and realized correlations (32.5% and 35.5%, respectively) is direct evidence of a large negative correlation risk premium. Empirical implementation of our model also indicates that the index variance risk premium can be attributed to the high price of correlation risk. Finally, we provide evidence that option-implied correlations have remarkable predictive power for future stock market returns, which also stays significant after controlling for a number of fundamental market return predictors.
#212 – Scheduled Economic Announcements Effect in Stocks
Nadler, Schmidt: Impact of Macroeconomic Announcements on US Equity Prices: 2009-2013
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2364077
Abstract:
Returns of several US equity ETFs on the days of major macroeconomic announcements are examined for the period of January 2009-July 2013. The ARMA GARCH model with external linear regression terms that describe announcement events and their surprises is used. It is found that mean daily returns may be notably higher on the announcement days than those for the buy-and-hold strategy though their difference may be not statistically significant. The choice of announcements with statistically significant regression coefficients yields higher mean daily returns and better Sharpe ratio but possibly lower compound returns.
#33 – Post-Earnings Announcement Effect
Barinov, Park, Yildizhan: Firm Complexity and Post-Earnings-Announcement Drift
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2360338
Abstract:
The paper shows that the post-earnings-announcement drift is stronger for conglomerates, despite conglomerates being larger, more liquid, and more actively researched by investors. We attribute this finding to slower information processing about complex firms and show that the post-earnings-announcement drift is positively related to measures of conglomerate complexity. We also find that the post-earnings-announcement drift is stronger for new conglomerates than it is for existing conglomerates and that investors are most confused about complicated firms that expand from within rather than firms that diversify into new business segments via mergers and acquisitions.
