New strategies:
#290 – Consistent Momentum Strategy
Period of rebalancing: 6 months
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1980 – 2011
Indicative performance: 16.08%
Estimated volatility: 25.33%
Source paper:
Chen, Chou, Hsieh: Persistency of the Momentum Effect: The Role of Consistent Winners and Losers
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2652592
Abstract:
Momentum profits, resulting from buying winners and selling losers, are robust in the stock market; however, less than 60% of winner and loser stocks remain in winner and loser groups in the subsequent formation month. This study applies duration analysis to test the persistency of the momentum effect and demonstrates that consistent winners and losers experience higher subsequent momentum profits than inconsistent winners and losers. Consistent with the information asymmetry hypothesis and the heterogeneous beliefs hypothesis, the momentum persistency is associated with size, idiosyncratic risk, institutional ownership, and trading volume. In addition, an asymmetric effect is observed—the post-formation return contributes to the winner persistency more, while the formation period return can explain the loser persistency more. The duration analysis also demonstrates that the trading volume reflects effects of both heterogeneous beliefs among investors and the momentum life cycle. The consistent momentum strategy may offer enhanced performance, despite controlling for factors associated with
market risk, size, book-to-market ratio, momentum effect, and liquidity risk.
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
#78 – Beta Factor in Country Equity Indexes
Schneider, Wagner, Zechner: Low Risk Anomalies?
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2593519
Abstract:
This paper shows theoretically and empirically that beta- and volatility-based low risk anomalies are driven by return skewness. The empirical patterns concisely match the predictions of our model that endogenizes the role of skewness for stock returns through default risk. With increasing downside risk, the standard capital asset pricing model (CAPM) increasingly overestimates expected equity returns relative to firms' true (skew-adjusted) market risk. Empirically, the profitability of betting against beta/volatility increases with firms' downside risk, and the risk-adjusted return differential of betting against beta/volatility among low skew firms compared to high skew firms is economically large. Our results suggest that the returns to betting against beta or volatility do not necessarily pose asset pricing puzzles but rather that such strategies collect premia that compensate for skew risk. Since skewness is directly connected to default risk, our results also provide insights for the distress puzzle.
#66 – Combining Momentum Effect with Volume
Bornholt, Dou, Malin: Trading Volume and Momentum: The International Evidence
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2693055
Abstract:
We investigate the role of trading volume in predicting the magnitude and persistence of the price momentum phenomenon in markets around the world. Using comprehensive data for 38,273 stocks from 37 countries, we show that past trading volume relates to both the level and persistence of momentum profits. The volume-based early stage momentum strategy outperforms the traditional momentum strategy in 34 out of 37 countries. In addition, we find evidence of a volume effect and we show that the degree of individualism in a country can explain the size of the volume effect in the markets investigated in this paper.
#224 – Profitability Factor Combined with Value Factor
Barinov: Profitability Anomaly and Aggregate Volatility Risk
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2696195
Abstract:
The paper shows that firms with lower profitability have lower expected returns because such firms perform better than expected when market volatility increases. The better-than-expected performance comes from the fact that unprofitable firms are distressed and volatile, and thus their equity resembles a call option on the assets. Consistent with that, the profitability anomaly is stronger for distressed and volatile firms, and aggregate volatility risk can explain this regularity.
Two additional related research paper have been included into existing free strategy reviews during last 2 week:
Related to multiple trend-following strategies
Nilsson: Trend Following – Expected Returns
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2689861
Abstract:
This paper describes how to create ex-ante expectation for generalized trend-following rules. This report first study the effect of trend-following rules applied to random data with varying degrees of drift and autocorrelation. There is a positive relationship between drift, autocorrelation and the theoretically extractable Sharpe ratio for a trend following strategy. Drift is more important, since it is theoretically unbounded, but strong auto-correlation can create positive returns in the absence of long term drift. The realized Sharpe ratio of a trend strategy is proportional to the absolute drift and auto-correlation of a market above a threshold. From a practical perspective, this means that anyone engaging in trend following strategies, should expect to generate positive returns if the drift is strong enough or if there is enough autocorrelation. Conversely, when there is no drift or auto-correlation, trend-following is not profitable. There is a strong preference for slower strategies under drift and transaction costs. Returns are compared to actual markets and indices of active traders (managed futures) and a high correlation is detected to the results in this paper. Trend-following should never be applied to a single market on a stand-alone basis. That said, even portfolios of trend following strategies have low expected Sharpe, especially so when the systems generated correlated trades. In the end, trend-following does not necessarily need uncorrelated markets, but rather uncorrelated system-market returns. A nuance that is often lost.
#28 – Value and Momentum across Asset Classes
Baz, Granger, Harvey, Le Roux, Rattray: Dissecting Investment Strategies in the Cross Section and Time Series
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2695101
Abstract:
We contrast the time-series and cross-sectional performance of three popular investment strategies: carry, momentum and value. While considerable research has examined the performance of these strategies in either a directional or cross-asset settings, we offer some insights on the market conditions that favor the application of a particular setting.
