New strategies:
#260 – Trend Following in Commodity Calendar Spreads
Period of rebalancing: daily
Markets traded: commodities
Instruments used for trading: futures
Complexity: Complex strategy
Bactest period: 1990 – 2013
Indicative performance: 3.73%
Estimated volatility: 4.09%
Source paper:
Neuhierl, Thompson: Trend Following Strategies in Commodity Markets and the Impact of Financialization
http://www.kellogg.northwestern.edu/faculty/neuhierl/jmp.pdf
Abstract:
This paper studies the returns to a simple trend following strategy in commodity markets and their potential drivers. We find that the strategy delivers low annualized returns in the period from 1990 to 2004 of 2.1% that show a significant increase from 2005 to 2013 to 6.5%, yielding Sharpe ratios of up to 1.8. This rise in returns coincides with the increase in participation in these markets by financial investors. Commodity markets entail particular features not shared by other assets classes, mainly physical delivery and the non-availability of infinitely lived contracts. For commodity funds that wish to maintain constant exposure, this means that they have to roll their positions to create an infinitely lived asset. This need to roll creates predictable demand for liquidity and predictable steepening and attening of the futures curve, which can be exploited by trend following strategies. We find that the strategies returns are positively correlated to the rebalancing demand of funds thereby providing novel evidence of limits of arbitrage in these markets.
New research papers related to existing strategies:
#6 – Volatility Effect in Stocks – Long-Short Version
#7 – Volatility Effect in Stocks – Long-Only Version
#77 – Beta Factor in Stocks
Wang: Institutional Holding, Low Beta and Idiosyncratic Volatility Anomalies
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2512411
Abstract:
Institutional investors subject to benchmarking, short-selling and leverage constraints have asymmetric effects on both low beta and low volatility anomalies documented by previous studies. Specifically, institutional investors prefer high-beta stocks to low-beta stocks to minimize the tracking error and utilize the embedded leverage of high beta stocks, leading to low-beta anomaly. They can act as the supply source of security lending to the short-sellers, mitigating the overpricing induced negative effect on expected returns from idiosyncratic volatility. Using size effect adjusted institutional ownership as a proxy for institutional limits to arbitrage, I confirm that mandated and financial constrained institutional investors contribute positively to the low beta anomaly but mitigate the low IVOL anomaly using sorting and Fama-MacBeth regressions. I distinguish the highly correlated low beta and low volatility anomalies and find a significantly positive risk premium for institutional holding. A strong January reversal effect of idiosyncratic volatility on expected return is also documented.
#6 – Volatility Effect in Stocks – Long-Short Version
#7 – Volatility Effect in Stocks – Long-Only Version
#77 – Beta Factor in Stocks
Baker, Wugler: The Risk Anomaly Tradeoff of Leverage
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2577948
Abstract:
The “low risk anomaly” refers to the empirical pattern that apparently high-risk equities do not earn commensurately high returns. In this paper, we consider the possibility that the risk anomaly represents mispricing, not a misspecification of risk, and develop the implications for corporate capital structure. The risk anomaly generates a simple tradeoff model: Starting at zero leverage, the overall cost of capital initially falls as leverage increases equity risk. As debt becomes risky, however, the marginal benefit of increasing equity risk declines. The optimum is reached at lower leverage for firms with high asset risk. Consistent with a risk anomaly tradeoff, firms with low-risk assets choose higher leverage. In addition, leverage is inversely related to systematic risk, holding constant total risk; a large number of firms maintain small or zero leverage despite high marginal tax rates; and many others maintain high leverage despite little tax benefit.
#52 – Asset Growth Effect
Fu: What Is behind the Asset Growth and Investment Growth Anomalies?
http://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=4158&context=lkcsb_research
Abstract:
Existing studies show that firm asset and investment growth predict cross-sectional stock returns. Firms that shrink their assets or investments subsequently earn higher returns than firms that expand their assets or investments. I show that the superior returns of the low asset and investment growth portfolios are due to the omission of delisting returns in CRSP monthly stock return file and that the poor returns of the high asset and investment growth portfolios are largely driven by the subsample of firms that have issued large amounts of debt or equity in the previous year. Controlling for the effects of the delisting bias and external financing, I do not find an independent effect of asset or investment growth on stock returns.
#65 – Enhanced Value Premium
Hyde: The Piotroski F Score in the Australian Market: Performance & Fundamental Drivers
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2577181
Abstract:
We show that when applied to the 200 largest stocks in the Australian market, the Piotroski signal generates long/short portfolio returns of 1.0% per month. However, much of this return is on the short side. The long/short return is much higher against smaller cap stocks and is evenly balanced between the long and short sides. Positive returns are generated in 74% of months. The premium to high F score stocks is robust to controls for the size, value and momentum risk premia. We use three separate tests to show that the standard explanation for the power of the F score signal – analyst neglect of the news contained in small stocks – isn't supported by the data. Other underlying forces must be at work.
#66 – Combining Momentum Effect with Volume
Li, Wei: Momentum Life Cycle Around the World
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2565305
Abstract:
We provide supporting evidence for the momentum life cycle hypothesis proposed by Lee and Swaminathan (2000) around the world. The early-stage strategy that longs low-turnover winner stocks and shorts high-turnover loser stocks significantly outperform both the late-stage strategy that longs high-turnover winners and shorts low-turnover losers and the conventional strategy in most countries. The results are robust and the economic magnitudes are large. The early-stage strategy even delivers positive momentum profits beyond the one-year horizon. Cross-country analysis shows that momentum profits are positively associated with individualism for the late-stage and conventional strategies but not for the early-stage strategy. In contrast, the association between momentum profits and limits-to-arbitrage is positive for the early-stage but negative for the late-stage strategy. Our results appear to support the behavioral momentum model of Daniel, Hirshleifer, and Subrahmanyam (1998) and the arbitrageurs’ mispricing amplifying role of Stein (2009).
#151 – EBIDTA/TEV Measure Effect
Loughran, Wellman: New Evidence on the Relation Between the Enterprise Multiple and Average Stock Returns
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1481279
Abstract:
Practitioners increasingly use the enterprise multiple as a valuation measure. The enterprise multiple is (equity value debt preferred stock – cash)/ (EBITDA). We document that the enterprise multiple is a strong determinant of stock returns. Following Fama and French (1993) and Chen, Novy-Marx, and Zhang (2010), we create an enterprise multiple factor that generates a return premium of 5.28% per year. We interpret the enterprise multiple as a proxy for the discount rate. Firms with low enterprise multiple values appear to have higher discount rates and higher subsequent stock returns than firms with high enterprise multiple values.
Four additional related research paper have been included into existing free strategy reviews during last 2 week:
#5 – FX Carry Trade
#8 – FX Momentum
#9 – FX Value – PPP Strategy
Pojarliev, Levich: A New Look at Currency Investing
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2571391
Abstract:
The authors of this book examine the rationale for investing in currency. They highlight several features of currency returns that make currency an attractive asset class for institutional investors. Using style factors to model currency returns provides a natural way to decompose returns into alpha and beta components. They find that several established currency trading strategies (variants of carry, trend-following, and value strategies) produce consistent returns that can be proxied as style or risk factors and have the nature of beta returns. Then, using two datasets of returns of actual currency hedge funds, they find that some currency managers produce true alpha. Finally, they find that adding to an institutional investor’s portfolio even a small amount of currency exposure — particularly to alpha generators — can make a meaningful positive impact on the portfolio’s performance.
#33 – Post-Earnings Announcement Effect
Kwon, Kim: Investment Horizon of Shareholders and Post-Earnings-Announcement Drift
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2545189
Abstract:
We hypothesize that post-earnings-announcement drift (PEAD) is caused by underreaction of long-term investors since they do not pay much attention to short-term events. Consistent with the hypothesis, empirical observations show that stocks mostly held by long-term investors exhibit strong PEAD, while stocks mostly held by short-term investors does not. The results are still robust even after transaction costs, investor recognition, temporal inattention, and reversal in earnings surprises are controlled for.
#44 – Paired Switching
Schizas, Thomakos: Market timing using asset rotation on exchange traded funds: a meta-analysis on trading performance
http://businessperspectives.org/journals_free/imfi/2013/imfi_en_2013_02cont_Schizas.pdf
Abstract:
The ultimate goal of any “paper” investment strategy is to achieve real-life profitability. This paper measures the performance of a trading rule based on the relative pricing and relative volatility of a rotation strategy between two assets, using data from passive ETFs. To avoid problems of pair selection we work with meta-data obtained after the evaluation of a large number of 351 pairs of ETFs. In this way the authors analyze the performance of the proposed strategy on the cross-section of different ETFs. The results show that rotation trading, as applied in this paper, offers advantages even when the simplest model is used in generating trading signals. Furthermore, the authors find that the differences in the actual mean returns (over the evaluation period), the correlation of the pair components and to (a lesser extend) the volatilities of the ETFs can explain the success of the rotation strategies.
#100 – Trading WTI/BRENT Spread
Authors: Lubnau: Spread trading strategies in the crude oil futures market
http://econstor.eu/bitstream/10419/96520/1/783913591.pdf
Abstract:
This article explores whether common technical trading strategies used in equity markets can be employed profitably in the markets for WTI and Brent crude oil. The strategies tested are Bollinger Bands, based on a mean-reverting hedge portfolio of WTI and Brent. The trading systems are tested with historical data from 1992 to 2013, representing 22 years of data and for various specifications. The hedge ratio for the crude oil portfolio is derived by using the Johansen procedure and a dynamic linear model with Kalman filtering. The significance of the results is evaluated with a bootstrap test in which randomly generated orders are employed. Results show that some setups of the system are able to be profitable over every five-year period tested. Furthermore they generate profits and Sharpe ratios that are significantly higher than those of randomly generated orders of approximately the same holding time. The best results with some Sharpe ratios in excess of three, are obtained when a dynamic linear model with Kalman filtering and maximum likelihood estimates of the unknown variance of the state equation is employed to constantly update the hedge ratio of the portfolio. The results indicate that the crude oil market may not be weak-form efficient.
