New strategies:
#464 – Brand Value Asset Pricing Factor
Period of rebalancing: Yearly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Simple strategy
Backtest period: 2000 – 2017
Indicative performance: 11.95%
Estimated volatility: 16.73%
Source paper:
Roger Ibbotson: Popularity: A Bridge between Classical and Behavioral Finance
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3474546
Abstract:
Popularity is a word that embraces how much anything is liked, recognized, or desired. Popularity drives demand. In this book, we apply this concept to assets and securities to explain the premiums and so-called anomalies in security markets, especially the stock market.
Most assets and securities have a relatively fixed supply over the short or intermediate term. Popularity represents the demand for a security — or perhaps the set of reasons why a security is demanded to the extent that it is — and thus is an important determinant of prices for a given set of expected cash flows.
A common belief in the finance literature is that premiums in the market are payoffs for the risk of securities — that is, they are “risk” premiums. In classical finance, investors are risk averse, and market frictions are usually assumed away. In the broadest context, risk is unpopular. The largest risk premium is the equity risk premium (i.e., the extra expected return for investing in equities rather than bonds or risk-free assets). Other risk premiums include, for example, the interest rate term premium (because of the greater risk of longer-term bonds) and the default risk premium in bond markets.
There are many premiums in the market that may or may not be related to risk, but all are related to investing in something that is unpopular in some way. We consider premiums to be the result of characteristics that are systematically unpopular — that is, popularity makes the price of a security higher and the expected return lower, all other things being equal. Preferences that influence relative popularity can and do change over time. These premiums include the size premium, the value premium, the liquidity premium, the severe downside premium, low volatility and low beta premiums, ESG premiums and discounts, competitive advantage, brand, and reputation. In general, any type of security with characteristics that tend to be overlooked or unwanted can have a premium.
The title of this book refers to a bridge between classical and behavioral finance. Both approaches to finance rest on investor preferences, which we cast as popularity.
#465 – Equity Momentum Leads Corporate Bonds
Period of rebalancing: Monthly
Markets traded: bonds
Instruments used for trading: bonds
Complexity: Complex strategy
Backtest period: 2000 – 2018
Indicative performance: 3.50%
Estimated volatility: 4.30%
Source paper:
Maitra, Anando, Salt, Jamie and Satchell, Stephen : Equity momentum in corporate bonds
https://biocircuits.ucsd.edu/huerta/AF_Huerta.pdf
Abstract:
Globally, equity and credit markets are highly correlated, reflecting the “risk-on” nature of both assets which is consistent with the structural model proposed by Merton (1974). Using a comprehensive data-set of USD denominated bonds since 2000, we show that equity markets are not only correlated but also lead corporate bond performance as well as rating agencies. Over the past 14 years, an Equity Momentum in Bonds (EMB) strategy that is long the top quintile by equity momentum outperforms the bottom quintile by over 6%/y in IG and by over 13%/y in HY corporate bond markets. The leading relationship of equities over corporate bonds is robust across rating categories, spreads and liquidity buckets and is not related to market effects. We show that the EMB strategy is not explained by the traditional equity momentum (EM) strategy but is more closely linked to changes in fundamentals. We also show that the time dynamics (term-structure) of the EMB strategy is very different from the traditional EM strategy thereby suggesting different underlying drivers. We propose “materiality” considerations as a key driver of this phenomena in which under-reaction to moderate equity price moves can potentially explain the lead-lag relationship.
#466 – Trend-Following and Spillover Effect
Period of rebalancing: Weekly
Markets traded: bonds, equities, currencies
Instruments used for trading: futures, forwards, CFDs, swaps
Complexity: Complex strategy
Backtest period: 1999 – 2019
Indicative performance: 3.20%
Estimated volatility: 4.80%
Source paper:
Declerck, Philippe: Trend-Following and Spillover Effects
https://ssrn.com/abstract=3473657
Abstract:
We start by documenting trend-following (or time series momentum) in government bond, currency and equity index (all developed countries) at the asset class level, and at the multi-asset level, using 29 liquid instruments, with lookback periods ranging from 1 to 60 months. A typical multi-asset trend-following strategy delivers strong returns for short to medium term lookback periods. I document that trends spill over to other asset classes: past trends of assets can help to build investment strategies using other related assets. This spillover effect works better when using longer lookback periods than the sweet spot for trend-following.
New research papers related to existing strategies:
#118 – Time Series Momentum Effect
Yang, Qian, Belton: Protecting the Downside of Trend When It’s Not Your Friend
https://www.iijournalseprint.com/JPM/Panagora/Jul19ProtectingtheDownsideofTrend73f/index.html?page=2
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3421108
Abstract:
Simple trend-following strategies have been documented as cost-effective, transparent alternatives to the hedge-fund style Managed Futures strategies. While largely capturing the returns of the Managed Futures industry, those simple strategies may periodically suffer significant losses due to over-simplified trend signals and under-diversified portfolio construction. In this article, the authors show that trend-following strategies with moderate sophistication and better diversification can significantly reduce the downside risk of simple trend-following strategies without sacrificing much upside potential. The authors therefore recommend investors who seek the benefits of cost-effective trend-following strategies to consider adding reasonable complexity to the strategies.
#199 – ROA Effect within Stocks
#229 – Earnings Quality Factor
Raju: Implementing a Systematic Long-only Quality Strategy in the Indian Market
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3490999
Abstract:
We believe investors should be willing to pay a higher price for higher quality companies. We build a composite quality score using ‘off -the-shelf’ criteria and publicly available financial data and show that a quarterly-rebalanced, long-only portfolio of 12 stocks selected using our score in India significantly outperforms the NIFTY 100 Index – both in terms of absolute returns (by 5.50% pa) and risk adjusted returns – while having an acceptable annual turnover (a modal turnover of 41.67%). We show that our quality score predicts the persistence of quality for up to 3 years and there is a weak relationship between the price multiple and the quality score. We show that ESG criteria can be incorporated into a quality measure. Furthermore, we demonstrate that quality needs to be reviewed regularly – so a buy-and-hold approach may not be an ideal strategy for an investor. In the absence of cheap ETFs to get systematic exposure to quality, the systematic long-only strategy using ‘off -the-shelf’ criteria provides a practical, executable systematic investment methodology that exposes an investor to quality in the Indian market.
And one interesting free blog post has been published during last 2 weeks:
Why Did Trend-Following Underperform Last Decade?
Trend-following funds and strategies were once extremely popular after the 2008/2009 crisis. They offered attractive performance, and diversification properties made them a nice addition to investor’s portfolios. Ten years later, “trend-following strategy” is not such a popular word. Strategies didn’t blow-up, but their performance was far from spectacular. What are the main reasons for that? Is it an increased correlation among markets? Are trend rules inefficient? An important recent academic study written by Babu, Hoffman, Levine, Ooi, Schroeder, and Stamelos (all from AQR Capital Management) analyzes trend-following performance for each decade in the last 140 years and uses three distinct factors: the magnitude of market moves, the efficacy of trend-following strategies at capturing profitability from market moves, and the degree of diversification across trends in a trend-following portfolio. They show that it’s the first factor (a lack of large risk-adjusted market moves, positive or negative) that had the biggest impact in the last decade. This suggests that trend-following strategies should be able to deliver better performance in the future if the size of the market moves reverts to levels more consistent with the long-term historical distribution of returns…
Authors: Babu, Hoffman, Levine, Ooi, Schroeder, and Stamelos
Title: You Can’t Always Trend When You Want
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