New strategies:
#297 – Combining Time-Series and Cross-Sectional Momentum
Period of rebalancing: monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1993-2014
Indicative performance: 23.58%
Estimated volatility: 35.79%
Source paper:
D'Souza, Srichanachaichok, Wang, Yaqiong Yao: The Enduring Effect of Time-Series Momentum on Stock Returns Over Nearly 100-Years
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2720600
Abstract:
This study documents the significant profitability of “time-series momentum” strategies in individual stocks in the US markets from 1927 to 2014 and in international markets since 1975. Unlike cross-sectional momentum, time-series stock momentum performs well following both up- and down-market states, and it does not suffer from January losses and market crashes. An easily formed dual-momentum strategy, combining time-series and cross-sectional momentum, generates striking returns of 1.88% per month. We test both risk based and behavioral models for the existence and durability of time-series momentum and suggest the latter offers unique insights into its continuing factor dominance.
#298 – Combining Fundamental and Transitory Component of Value Strategy
Period of rebalancing: yearly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1981-2014
Indicative performance: 9.03%
Estimated volatility: 9.71%
Source paper:
Jiang: Decomposing Valuation Signals
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2679401
Abstract:
I project the price-to-book ratio in the cross-section of firms onto a vector of cash flow variables and thereby decompose its variation into two components. The fundamental component is the fitted value based on the cash flow variables, and the transitory component is the residual term. I show that firms with high fundamental component have high price-to-book ratio and high subsequent stock return, while firms with high transitory component have high price-to-book ratio and low subsequent stock return. This prediction is confirmed in the data, and it also applies to other valuation signals including price-to-dividend, price-to-earnings and price-to-debt ratio. Moreover, I show that the fundamental component predicts return because it captures sluggish price adjustment of institutional investors, which leads to underreaction to cash flow news; the transitory component predicts return because it captures return reversal, which comes from overreaction to discount rate news.
New research paper related to existing strategies:
#6 – Volatility Effect in Stocks – Long-Short Version
#7 – Volatility Effect in Stocks – Long-Only Version
Blitz: The Value of Low Volatility
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2730557
Abstract:
The evidence for the existence of a distinct low-volatility effect is mounting. However, implicit exposures to the Fama-French value factor (HML) seem to explain the performance of straightforward U.S. low-volatility strategies since 1963. In this paper I show that the value effect can neither explain the performance of large-cap low-volatility strategies pre-1963, nor post 1984, when the Fama-French value factor itself ceased to be effective in the large-cap segment of the market. Moreover, the performance of small-cap low-volatility strategies cannot be explained by the value effect during any period. Fama-MacBeth regressions support the existence of a low-volatility effect for every subsample. Based on these results and various other arguments I conclude that there exists a distinct low-volatility effect which cannot be explained by the value effect. The combined evidence even appears to be stronger for the low-volatility effect than for the value effect.
#229 – Earnings Quality Factor
Bouchaud, Stefano, Landier, Simon, Thesmar: The Excess Returns of 'Quality' Stocks: A Behavioral Anomaly
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2717447
Abstract:
This note investigates the causes of the quality anomaly, which is one of the strongest and most scalable anomalies in equity markets. We explore two potential explanations. The "risk view", whereby investing in high quality firms is somehow riskier, so that the higher returns of a quality portfolio are a compensation for risk exposure. This view is consistent with the Efficient Market Hypothesis. The other view is the "behavioral view", which states that some investors persistently underestimate the true value of high quality firms. We find no evidence in favor of the "risk view": The returns from investing in quality firms are abnormally high on a risk-adjusted basis, and are not prone to crashes. We provide novel evidence in favor of the "behavioral view": In their forecasts of future prices, and while being overall overoptimistic, analysts systematically underestimate the future return of high quality firms, compared to low quality firms.
Two additional related research paper have been included into existing free strategy reviews during last 2 week:
Related to multiple strategies:
Ebner: Risk and Risk Premia: A Cross-Asset Class Analysis
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2711624
Abstract:
The existence of risk premia has been widely documented in the academic literature over the past decades. Until now they have typically been handled as separate phenomena for specific markets or asset classes and thus examined independently. This study analyses risk premia across a variety of asset classes and risk styles to uncover their common performance characteristics, underlying risk sources and return’s sensitivity to economic factors. Based on a set of 16 risk premia over a 22 year sample period we were able to illustrate that risk premia’s expected returns are significantly influenced by their volatility and their sensitivity to funding liquidity and market volatility. Furthermore we show that macroeconomic factors such as industrial production and inflation have a significant effect on the expected returns of the entire set of risk premia. Finally, analysing the link between premia and the global market portfolio shows that premia with unfavourable comoments possess superior expected returns.
#31 – Market Seasonality Effect in World Equity Indexes
Dzahabarov, Ziemba: Sell in May and Go Away in the Equity Index Futures Markets
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2721068
Abstract:
The period May 1 to the turn of the month of November (last five trading days October) has historically produced negligible returns. The rest of the year (late October to the end of April) has essentially all the year's gains. In this paper we show that there is a statistically significant difference and conclude that the strategy go to cash in the weak period and go long in the strong period has about double the returns of buy and hold for large cap S&P500 index and triple for the small cap Russell2000 index during the period 1993-2015 in the index futures markets.
