New strategies:
#281 – Skewness Effect in Commodities
Period of rebalancing: monthly
Markets traded: commodities
Instruments used for trading: futures, CFDs
Complexity: Simple strategy
Bactest period: 1987 – 2014
Indicative performance: 8.01%
Estimated volatility: 10.20%
Source paper:
Fernandez-Perez, Frijns, Fuertes, Miffre: Commodities as Lotteries: Skewness and the Returns of Commodity Futures
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2671165
Abstract:
This article studies the relation between skewness and subsequent returns in commodity futures markets. Systematically buying commodities with low skewness and shorting commodities with high skewness generates a significant excess return of 8% a year, which is not merely a compensation for the risks associated with backwardation and contango. Skewness is also found to explain the cross-section of commodity futures returns beyond exposures to the backwardation and contango risk factors previously identified. These results are robust to various alternative specifications and extend the documented importance of skewness in the equity market to the commodity futures markets.
#282 – Trading based on Higher Moments in Currency Markets
Period of rebalancing: monthly
Markets traded: currencies
Instruments used for trading: futures, CFDs, swaps
Complexity: Complex strategy
Bactest period: 1989 – 2014
Indicative performance: 11.07%
Estimated volatility: 8.00%
Source paper:
Zunft: A Low-Risk Strategy based on Higher Moments in Currency Markets
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2666223
Abstract:
I identify a new strategy in currency forward markets that exploits the predictive power of functions of higher moments of currency returns. The strategy is long in currencies whose higher return moments are low relative to past levels and short in currencies whose higher return moments are high relative to past levels. The low-risk strategy based on higher moments is not spanned by traditional currency strategies. In a sample of roughly 25 years, it provides the highest mean excess payoff and Sharpe ratio as well as the smallest drawdown in comparison to them. The profitability of the strategy is not explained by standard risk factors and limits-to-arbitrage.
New research papers related to existing strategies:
#4 – Overnight Anomaly
#272 – Overnight Stock Trading
Aretz, Bartram: Making Money While You Sleep? Anomalies in International Day and Night Returns
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2670841
Abstract:
In this paper, we decompose return premia into day and night components based on a sample of more than 48,000 stocks from 35 countries including the United States. Day returns are higher than night returns, but have similar volatility. Payoffs to value- or equally-weighted investment strategies based on size, book-to-market, momentum, long-term reversals, accruals, net share issuances, asset growth, and profitability tend to be positive for day returns, but negative or zero for night returns. Fama-MacBeth tests show that the well-known relationships between total returns and lagged firm characteristics are the result of their relationships with day returns, while their relationships with night returns are of opposite signs. While contemporaneous, independent work by Lou et al. (2015) also documents that U.S. price momentum occurs overnight, this result is the exception rather than the rule, since price momentum as well as most other anomalies are driven by day returns outside the United States. Results are robust across countries and subsamples, although there are variations in the magnitude of the strategy payoffs across countries.
Two additional related research paper have been included into existing free strategy reviews during last 2 week:
#5 – FX Carry Trade
Ready, Roussanov, Ward: Commodity Trade and the Carry Trade: A Tale of Two Countries
http://jacobslevycenter.wharton.upenn.edu/wp-content/uploads/2015/05/Commodity-Trade-and-the-Carry-Trade-4.3.15.pdf
Abstract:
Persistent differences in interest rates across countries account for much of the profitability of currency carry trade strategies. The high-interest rate "investment" currencies tend to be "commodity currencies," while low interest rate "funding" currencies tend to belong to countries that export finished goods and import most of their commodities. We develop a general equilibrium model of international trade and currency pricing in which countries have an advantage in producing either basic input goods or final consumable goods. The model predicts that commodity-producing countries are insulated from global productivity shocks through a combination of trade frictions and domestic production, which forces the final goods producers to absorb the shocks. As a result, the commodity country currency is risky as it tends to depreciate in bad times, yet has higher interest rates on average due to lower precautionary demand, compared to the final-good producer. The carry trade risk premium increases in the degree of specialization, and the real exchange rate tracks relative technological productivity of the two countries. The model's predictions are strongly supported in the data.
#14 – Momentum Effect in Stocks
Goetzmann, Huang: Momentum in Imperial Russia
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2663482
Abstract:
Some of the leading theories of momentum have different empirical predictions about its profitability conditional on market composition and structure. The overconfidence explanation provided by Daniel, Hirshleifer, and Subrahmanyam (1998), for example, predicts lower momentum profits in markets with more sophisticated investors. The information-based theory of Hong and Stein (1999) predicts lower momentum profits in markets with lower informational frictions. The institutional theory of Vayanos and Woolley (2013) predicts lower momentum profits in markets with less agency. In this paper we use a dataset from a major 19th century equity market to test these predictions. Over this period there was no evidence of delegated management in Imperial Russia. A regulatory change in 1893 made speculating on the St. Petersburg stock market more accessible to small investors. We find a momentum effect that is similar in magnitude to those in modern markets, and stronger during the post-1893 period than during the pre-1893 period, consistent with the overconfidence theory of momentum.
