New strategies:
#249 – Momentum Effect in Stocks Combined with Stop-Losses
Period of rebalancing: daily
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1926 – 2011
Indicative performance: 15.80%
Estimated volatility: 17.94%
Source paper:
Han, Zhou: Taming Momentum Crashes: A Simple Stop-Loss Strategy
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2407199
Abstract:
In this paper, we propose a simple stop-loss strategy to limit the downside risk of the well-known momentum strategy. At a stop-level of 10%, we find empirically with data from January 1926 to December 2011 that the monthly losses of the equal-weighted momentum strategy can go down substantially from -49.79% to within -11.34%. For the value-weighted momentum strategy, the losses reduce from -65.34% to within -23.69% (to within -14.85% if year 1932 is excluded). At the same time, the average returns and the Sharpe ratios with use of the stops are more than doubled. Our results indicate that the abnormal profitability of the momentum strategy is unlikely explained by crash risk.
New research papers related to existing strategies:
#1 – Asset Class Trend Following
Zakamulin: The Real-Life Performance of Market Timing with Moving Average and Time-Series Momentum Rules
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2242795
Abstract:
In this paper we revisit the myths about the superior performance of the market timing strategies with moving average and time-series momentum rules. These active timing strategies are very appealing to investors because of their extraordinary simplicity and because they promise substantial advantages over their passive counterparts (see, for example, the paper by M. Faber (2007) “A Quantitative Approach to Tactical Asset Allocation" published in the Journal of Wealth Management). However, “too good to be true" reported performance of these market timing rules raises a legitimate concern whether this performance is realistic and whether the investors can hope that the expected future performance will be the same as the documented historical performance. We argue that the reported performance of market timing strategies usually contains a considerable data-mining bias and ignores important market frictions. In order to deal with these issues, we perform out-of-sample tests of these two timing models where we account for realistic transaction costs. Our findings reveal that at best the real-life performance of the market timing strategies is only marginally better than that of the passive counterparts.
#80 – Earnings Announcement Premium
Johnson, So: Earnings Announcement Premia: The Role of Asymmetric Liquidity Provision
http://www.mccombs.utexas.edu/~/media/Files/MSB/Departments/Accounting/Brownbag%20papers/JohnsonSo_20140321.pdf
Abstract:
This study examines the link between earnings announcement premia (i.e., higher returns in announcement periods) and changes in liquidity prior to the announcements. Motivated by prior research, we model market makers as holding positive inventories and show they asymmetrically raise costs of providing liquidity to sellers, relative to buyers, to reduce inventory risks ahead of earnings news. This asymmetry gives rise to the announcement premium by increasing the relative cost of trading on negative news. Consistent with our friction-based hypothesis, we show that equity prices predictably rise in the week prior to announcements and gradually decline following announcements. Our model also yields implications of this friction for trading activity, price dynamics, and the information content of prices, all of which we validate in our empirical tests
#31 – Market Seasonality Effect in World Equity Indexes
Okada, Yamasaki: Investor Sentiment in News and the Calendar Anomaly — New Evidence from a Large Textual Data
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2394008
Abstract:
The well-known stock market adage "sell in May and go away" arose from long-term stock market seasonality in major financial markets around the globe. Kamastra, Kramer and Levy (2003) present evidence that Seasonal Affective Disorder causes this seasonality, as this condition has a profound effect on people’s mood and makes people increasingly risk averse as daylight diminishes with the onset of winter. In this paper, we present evidence that change in market mood is reflected in the prospect statement in the news text. We employ a text-mining technique to analyze a large quantity of newspaper articles for the period 1986–2010 and created our market mood proxy. We find investor psychology is skewed to optimism in the first half of the calendar year and pessimism in the latter. We also find that semi-annual mood fluctuation is synchronous with market seasonality.
#5 – FX Carry Trade
Lu, Jacobsen: Cross-Asset Return Predictability: Carry Trades, Stocks and Commodities
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2398102
Abstract:
Bakshi and Panayotov (2013) find that commodity price changes predict profits from longing high interest rate currencies (long leg profits) up to three months later. We find that equity returns also predict carry trade profits, but from shorting low interest rate currencies (short leg profits). Equity effects appear to be slightly faster than commodity effects, as equity price rises predict higher short leg profits over the next two months. The predictability is one-directional from commodities and stocks to carry trades. Our evidence supports gradual information diffusion, rather than time-varying risk premia, as the most likely explanation for the predictability results.
