New strategies:
#264 – Dividend Risk Premium Strategy
Period of rebalancing: daily
Markets traded: equities
Instruments used for trading: futures
Complexity: Simple strategy
Bactest period: 2008 – 2013
Indicative performance: 12.90%
Estimated volatility: 11.60%
Source paper:
Bourgois, Tom (Credit Suisse): Extracting The Dividend Risk Premium
https://edge.credit-suisse.com/Edge/public/bulletin/ServeFile.aspx?FileID=24848&m=-187350540
Abstract:
Over the last handful of years, dividends ceased to be considered as only a side product of equity investments, and the assertion that they constitute an asset class of their own right has become more and more common. While this is mostly linked to the recent development of a mature, liquid dividend futures market, there are also fundamental and technical reasons to differentiate dividends from stocks or corporate bonds; in particular dividends are at times loosely correlated to equity, and exhibit lower volatility. In this report we draw the following conclusions: dividends follow their own dynamics, the dividend risk premium is rich, it is possible to build profitable systematic dividend strategies.
#265 – Days to Cover Strategy
Period of rebalancing: monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1988 – 2012
Indicative performance: 8.34%
Estimated volatility: 17.87%
Source paper:
Hong, Li, Ni, Scheinkman, Yan: Days to Cover and Stock Returns
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2568768
Abstract:
The short ratio — shares shorted to shares outstanding — is an oft-used measure of arbitrageurs’ opinion about a stock’s over-valuation. We show that days-to-cover (DTC), which divides a stock’s short ratio by its average daily share turnover, is a more theoretically well-motivated measure because trading costs vary across stocks. Since turnover falls with trading costs, DTC is approximately the marginal cost of the shorts. At the arbitrageurs’ optimum it equals the marginal benefit, which is their opinion about over-valuation. DTC is a better predictor of poor stock returns than short ratio. A long-short strategy using DTC generates a 1.2% monthly return.
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
Cannon: The Idiosyncratic Volatility Puzzle: A Behavioral Explanation
http://digitalcommons.usu.edu/cgi/viewcontent.cgi?article=1475&context=gradreports
Abstract:
In this study, I propose an alternative explanation for the idiosyncratic volatility puzzle. I postulate that the negative coefficient observed between idiosyncratic volatility and future returns is driven by investor sentiment. The results obtained from these analyses support the idea that the idiosyncratic volatility puzzle can be explained by investor sentiment. In periods of high investor sentiment, investors are optimistic in choosing stocks. Such effects lead investors to flock to assets with high idiosyncratic volatility, creating the negative relationship with return. Furthermore, in periods of lowest investor sentiment, results indicate a natural, positive relationship between idiosyncratic volatility and future returns, supporting standard risk-return theory.
#31 – Market Seasonality Effect in World Equity Indexes
Dichtl, Drobetz: Sell in May and Go Away: Still Good Advice for Investors?
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2439280
Abstract:
The “Sell in May and Go Away” (or Halloween) strategy continues to enjoy great popularity in practice. We explore whether this simple trading rule still offers an opportunity to earn abnormal returns. In contrast to prior studies, we consider sample periods during which adequate investment instruments were available for an effective implementation of the Halloween strategy. In addition, we account for when the first study confirming the Halloween effect was published in a top academic journal. To use the limited data in the most efficient way, and to avoid possible data-snooping biases, we implement a bootstrap simulation approach. We find that the Halloween effect strongly weakened or even diminished in recent years. Our results are robust across different countries and against various parameter variations. Overall, our findings support the theory of efficient capital markets.
Four additional related research paper have been included into existing free strategy reviews during last 2 week:
#3 – Sector Momentum – Rotational System
Du Plessis, Hallerbach: Volatility Weighting Applied to Momentum Strategies
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2599635
Abstract:
We consider two forms of volatility weighting (own volatility and underlying volatility) applied to cross-sectional and time-series momentum strategies. We present some simple theoretical results for the Sharpe ratios of weighted strategies and show empirical results for momentum strategies applied to US industry portfolios. We find that both the timing effect and the stabilizing effect of volatility weighting are relevant. We also introduce a dispersion weighting scheme which treats cross-sectional dispersion as (partially) forecastable volatility. Although dispersion weighting improves the Sharpe ratio, it seems to be less effective than volatility weighting.
#5 – FX Carry Trade
Nunes, Piloiu: Uncovered Interest Rate Parity: A Relation to Global Trade Risk
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2595165
Abstract:
The paper gives evidence of a novel pricing factor for the cross-section of carry trade returns based on trade relations between countries. In particular, we apply network theory on countries' bilateral trade to construct a measure for countries' exposure to a global trade risk. A higher level of exposure implies that the economic activity in one country is highly dependent on the economic activity of its trade partners and on aggregate trade flow. We test the following hypothesis for carry trade strategies: high interest rate currencies are more exposed to global trade risk than low interest rates ones. We find empirically that low interest rate currencies are seen by investors as a hedge against global trade risk while high interest rate currencies deliver low returns when global trade risk is high, being negatively related to the global trade risk factor. These results provide evidence on the underlying macroeconomic sources of systematic risk in FX markets while accounting as well for other previously documented risk factors, such as the market factor and the volatility and liquidity risks.
#12 – Pairs Trading with Stocks
Almeida: Improving Pairs Trading
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2432061
Abstract:
This paper tests the Pairs Trading strategy as proposed by Gatev, Goetzmann and Rouwenhorts (2006). It investigates if the profitability of pairs opening after an above average volume day in one of the assets are distinct in returns characteristics and if the introduction of a limit on the days the pair is open can improve the strategy returns. Results suggest that indeed pairs opening after a single sided shock are less profitable and that a limitation on the numbers of days a pair is open can significantly improve the profitability by as much as 30 basis points per month.
#20 – Volatility Risk Premium Effect
Israelov, Nielsen: Still Not Cheap: Portfolio Protection in Calm Markets
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2579232
Abstract:
Recent equity volatility is near all-time lows. Option prices are also low. Many analysts suggest this represents a good opportunity to purchase put options for portfolio insurance. It is well-known that portfolio insurance is expensive on average, but what about in calm markets? History suggests it still is. We investigate the relationship between option richness and volatility across ten global equity indices. Option prices may be low, but their expected values tend to be even lower.
