New strategies:
#472 – Jump-Only Momentum and Reversal in Currency Markets
Period of rebalancing: Monthly
Markets traded: currencies
Instruments used for trading: futures, CFDs
Complexity: Very complex strategy
Backtest period: 2001-2018
Indicative performance: 8.83%
Estimated volatility: 9.10%
Source paper:
He, Yunhao: Jump-Only Momentum and Reversal in Currency Markets
https://ssrn.com/abstract=3493732
Abstract:
This paper investigates the momentum and reversal signals in exchange rate jumps in currency markets. Following exchange rate jumps, currencies from emerging markets appreciate, but currencies from developed economies depreciate. Stepwise multiple testing confirms non-jump exchange rate changes signal neither momentum nor reversal. I construct strategies based on exchange rate jumps only, which perform better than pure momentum or reversal strategies with Sharpe ratios exceeding one. Returns of such strategies are robust out-of-sample and after transaction costs. A panel regression of aggregated jump sizes on macroeconomic factors suggests that exchange rate jumps in emerging markets are related to the country’s GDP, while those in developed countries are explained by trade with the US.
#473 – Cross-Asset Skewness Effect
Period of rebalancing: Monthly
Markets traded: equities, bonds, commodities, currencies
Instruments used for trading: CFDs, futures
Complexity: Complex strategy
Backtest period: 1990-2017
Indicative performance: 3.50%
Estimated volatility: 4.86%
Source paper:
Nick Baltas and Gabriel Salinas: Cross-Asset Skew
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3505422
Abstract:
We find that realized skewness is a significant indicator of returns across a range of assets from different asset classes, namely commodities, government bonds, equity indices and currencies. Taking on skewness risk is broadly compensated within, but more substantially across asset classes. Portfolios in these four asset classes with long positions on most negatively (or least positively) skewed assets and short positions on least negatively (or most positively) skewed assets generate on average a Sharpe ratio of 0.35 between 1990 and 2017. We find little evidence of a common risk driver among these portfolios, to the extent that their combination benefits substantially from diversification, delivering a Sharpe ratio of 0.72. The patterns are not subsumed by other known factors that drive returns, such as value, momentum or carry factors and, consequently, mean-variance efficient multi-factor portfolios assign a positive weight to skewness. Our results remain robust to different measures of skewness and across sub-samples.
New research papers related to existing strategies:
#12 – Pairs Trading with Stocks
Xu: Optimal Arbitrage under Limits to Arbitrage: The Case of Convergence Trade
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3483425
Abstract
As a popular arbitrage strategy, convergence trade aims to exploit relative mispricing between two closely related assets. We examine optimal convergence trade strategies in the presence of three types of limits to arbitrage: short-selling cost, funding cost, and forced liquidation of investment positions. Our results show that the optimal allocation rules are piecewise linear functions of the mispricing level, allowing the trader to better balance the profits and costs incurred when she trades on mispricing. We also find that these limits to arbitrage have a stronger deterrence effect on short-selling than on purchasing, driving the optimal trading strategy significantly away from a delta-neutral one. Moreover, we find that it is optimal to liquidate positions on the convergence assets faster when the fund’s termination risk increases.
#14 – Momentum Factor Effect in Stocks
Malitskaia: Uncovering Momentum
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3502301
Abstract
The explanation of the momentum premium represents an ongoing challenge, triggering the development of multiple risk-based and behavioral models. The paper explores the momentum strategy following a systematic divide-and-conquer approach composed from a sequence of top-bottom steps: dissecting the momentum performance along bull/bear states and winners/losers deciles; identifying the unscaled momentum decile as a basic common block across conventional, time-series and dual momentum strategies; rolling the combined in- and out-of-sample analysis, and clustering momentum decile time series. The corresponding findings support the Efficient Market Hypothesis and compliment existing models with techniques for identifying and assessing temporal patterns.
#406 – Cash-Based Operating Profitability
Wang: A New Value Strategy
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3507251
Abstract
We construct a new value measure—the ratio of cash-based operating profitability to price (COP/P)—and find a zero-investment portfolio that buys the highest-COP/P stocks and shorts the lowest-COP/P stocks earns annualized returns of 11% on a value-weighted basis and 13% on an equal-weighted basis. The COP/P effect holds even for large-capitalization stocks, is distinct from known return predictors, cannot be explained by existing factor models, and exists even in the most recent decade when book-to-market predicts returns negatively. The COP/P measure subsumes exist
And two interesting free blog post has been published during last 2 weeks:
What is the Bitcoin’s Risk-Free Interest Rate?
Some see Bitcoin (BTC) as a payment method of the future; others see it as a speculative asset class. Despite the speculative activity connected with Bitcoin, after all, it is a currency that is different from fiat currencies like the US Dollar or Euro. If you hold fiat currency, there is an opportunity to earn a risk-free rate. But is there the same opportunity also in Bitcoin? And what are the Bitcoin’s risk-free and market rates? These are the questions we had in Quantpedia, and we invite you to join us in our thought experiment that tries to answer them …
Authors:Vojtko, Padysak
Title: What is the Bitcoin’s Risk-Free Interest Rate?
Do Copycat CTAs Outperform Individualistic CTAs?
Our society teaches us, that it is good to be different. That our trading strategy must be always unique, creative and individualistic. It is boring and unprofitable to be the “average”, to do what the others do. And then, there is a research paper written by Bollen, Hutchinson and O’Brian which offers the opposite view. Their analysis explains there exist one hedge fund style where everything is the other way round – trend-following CTA funds. Their interesting (but for some maybe controversial) paper shows that CTAs with returns that correlate more strongly with those of peers have higher performance. It appears that CTA strategy conformity is a signal of managerial skill. Now, that is an eccentric idea 🙂
Authors: Bollen, Hutchinson and O’Brian
Title: When It Pays to Follow the Crowd: Strategy Conformity and CTA Performance
