New strategies:
#269 – Intraday Currency Seasonality
Period of rebalancing: intraday
Markets traded: currencies
Instruments used for trading: futures, CFDs
Complexity: Simple strategy
Bactest period: 2010 – 2014
Indicative performance: 6.60%
Estimated volatility: 8.31%
Source paper:
Jiang: Currency Returns in Different Time Zones
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2613592
Abstract:
Currency returns in different time zones have different dynamics. During European business hours, European currencies on average appreciate against the U.S. dollar; and during US business hours, European currencies on average depreciate. The difference generates a profitable trading strategy. I explain this pattern based on market segmentation and exporters' trading pattern. Market segmentation in the time dimension prevents the exporters in different time zones from trading directly with each other. To sell foreign currencies, the exporters rely on the financial intermediaries to carry the currency positions from day to night. The financial intermediaries charge a risk premium for their service, and therefore force the foreign currencies to appreciate during home business hours.
#270 – Turn of the Month Effect in the Cross-Section of Stock Returns
Period of rebalancing: daily
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1980 – 2013
Indicative performance: 17.18%
Estimated volatility: not stated
Source paper:
Rinne, Suominen, Vaittinen: Dash for Cash: Month-End Liquidity Needs and the Predictability of Stock Returns
http://www.hec.fr/heccontent/download/39761/512397/version/3/file/29+janvier+SSRN-id2528692.pdf
Abstract:
This paper uncovers strong return reversals in stock market returns around the last monthly settlement day, T-3, which guarantees liquidity for month-end cash distributions. We show that these return reversals are stronger in countries where the mutual fund ownership is large, and that in the US the return reversals have become stronger over time as the mutual fund ownership of stocks has increased. Finally, in the cross-section of stocks, the reversals around turn of the month are stronger for stocks more commonly held by mutual funds, for liquid stocks, and for more volatile stocks (controlling for liquidity).
New research papers related to existing strategies:
#5 – FX Carry Trade
Bekaert, Panayotov: Good Carry, Bad Carry
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2600366
Abstract:
We distinguish between "good" and "bad" carry trades constructed from G-10 currencies. The good trades exhibit higher Sharpe ratios and slightly negative or even positive skewness, in contrast to the bad trades that have both substantially lower Sharpe ratios and skewness. Surprisingly, good carry trades do not involve the most typical carry trade currencies like the Australian dollar and Japanese yen. The distinction between good and bad trades significantly alters our understanding of currency carry trade returns. It invalidates, for example, explanations invoking return skewness and crash risk, as the negative return skewness is induced by the typical carry currencies. We find strong predictability with previously identified carry return predictors for bad, but not good carry trade returns. In addition, a static carry component explains a much larger proportion of bad carry trade returns, than of good carry trade returns. Furthermore, good carry trade returns perform better than bad carry trade returns as a risk factor, explaining the returns of interest-rate sorted currency portfolios, and in turn are better explained with equity market risk factors.
#112 – Acceleration Effect Combined with Momentum in Stocks
Chen, Wang, Yu: The Formation Process of Winners and Losers in Momentum Investing
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2610571
Abstract:
Previous studies have focused on which stocks are winners or losers but have paid little attention to the formation process of past returns. This paper develops a model showing that past returns and the formation process of past returns have a joint effect on future expected returns. The empirical evidence shows that the zero-investment portfolio, including stocks with specific patterns of historical prices, improves monthly momentum profit by 59%. Overall, the process of how one stock becomes a winner or loser can further distinguish the best and worst stocks in a group of winners or losers.
Three additional related research paper have been included into existing free strategy reviews during last 2 week:
#8 – FX Momentum
Grobis, Heinonen: Is Momentum in Currency Markets Driven by Global Economic Risk?
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2619146
Abstract:
This article documents a robust link between the returns of the momentum anomaly implemented in currency markets and global economic risk, measured by the currency return dispersion (RD). We find the spread of the zero-cost momentum strategy to be significantly larger in high RD states compared to low RD states. The relation between momentum payoffs and global economic risk appears to increase linearly in risk. Notably, the results provide strong evidence that the same global economic risk component is present in equity markets.
#100 – Trading WTI/BRENT Spread
Donninger: The Poverty of Academic Finance Research: Spread Trading Strategies in the Crude Oil Futures Market
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2617585
Abstract:
Harvey, Liu and Zhu argue that probably most of the Cross-Section of Returns literature is garbage. One can always try an additional factor and will find a significant Cross-Sectional result with enough trial and error. Lopez de Prado argues in a series of articles in a similar vein. Theoretically scientific results are falsifiable. Practically previous results and publications are checked only in rare occasions. Growth in a Time of Depth by Reinhart-Rogoff was the most influential economic paper in recent years. It was published in a top journal. Although the paper contained even trivial Excel-Bugs it took 3 years till the wrong results and the poor methodology was fully revealed. The reviewers did not check the simple spreadsheets. This paper analyzes a less prominent example about spread trading in the crude oil futures market by Thorben Lubnau. The author reports for his very simple strategy a long term Sharpe-Ratios above 3. It is shown that – like for Reinhart-Rogoff – one needs no sophisticated test statistics to falsify the results. The explanation is much simpler: The author has no clue of trading. He used the wrong data.
#118 – Time Series Momentum Effect
Georgopoulou, Wang: The Trend is Your Friend: Time-Series Momentum Strategies Across Equity and Commodity Markets
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2618243
Abstract:
Using a dataset of 67 equity and commodity indices from 1969 to 2013, this study documents a significant time-series momentum effect across international equity and commodity markets. This paper further documents that international mutual funds have a tendency to buy instruments that have been performing well in recent months, but they do not systematically sell those that have been performing poorly in the same periods. We also find that a diversified long-short momentum portfolio realizes its largest profits in extreme market conditions, but the market interventions by central banks in recent years seem to challenge the performance of such portfolios.
