New strategies:
#309 – Subsidiary – Parent Equity Momentum
Period of rebalancing: monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1985-2010
Indicative performance: 14.03%
Estimated volatility: 14.51%
Source paper:
Li, Tang,Yan: Corporate Equity Ownership and Expected Stock Returns
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2766799
Abstract:
We investigate the cross-sectional predictive relations between stock returns of two public firms with one firm, the parent, owning partial equity of the other, the subsidiary. We find that high past returns of the subsidiary (parent) predict high future returns of the parent (subsidiary). The subsidiary-to-parent predictability does not exist before the ownership is established, remains intact after controlling for a variety of stock characteristics, and is stronger among stocks with higher barriers to arbitrage and lower degree of investor attention. The parent-to-subsidiary predictability is, however, unlikely to be caused by corporate equity ownership, but by other forces such as the industry lead-lag effects.
#310 – Headquarter Location Momentum
Period of rebalancing: monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1971-2013
Indicative performance: 5.06%
Estimated volatility: 8.99%
Source paper:
Parsons, Sabbatucci: Geographic Momentum
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2780139
Abstract:
We document geographic momentum: a positive lead-lag stock return relation between neighboring firms operating in different sectors. Geographic momentum yields risk-adjusted returns of 5-6% per year, about half that observed for industry momentum. However, while industry momentum is strongest among thinly traded, small firms, and/or those with scant analyst following, geographic momentum is unrelated to these proxies for information processing. We propose an explanation linking this to the structure of the investment analyst business, which is organized by sector, rather than by geographic region.
New research papers related to existing strategies:
#304 – Seasonality in Treasury Auctions Strategy
Fleming, Rosenberg: How Do Treasury Dealers Manage Their Positions?
https://www.newyorkfed.org/research/staff_reports/sr299.html
Abstract:
Using data on U.S. Treasury dealer positions from 1990 to 2006, we find evidence of a significant role for dealers in the intertemporal intermediation of new Treasury security supply. Dealers regularly take into inventory a large share of Treasury issuance so that dealer positions increase during auction weeks. These inventory increases are only partially offset in adjacent weeks and are not significantly hedged with futures. Dealers seem to be compensated for the risk associated with these inventory changes by means of price appreciation in the subsequent week.
#12 – Pairs Trading with Stocks
#55 – Pairs Trading with Country ETFs
Riedinger: Demystifying Pairs Trading: The Role of Volatility and Correlation
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2774063
Abstract:
This paper investigates how the two technical drivers, volatility and correlation, influence the algorithm of the investment strategy pairs trading. We model and empirically prove the connection between the rule-based pair selection, the trading algorithm, and the total return. Our insights explain why pairs trading profitability varies across markets, industries, macroeconomic circumstances, and firm characteristics. Furthermore, we critically evaluate the power of the traditionally applied pair selection procedure. In the US market, we find risk-adjusted monthly returns of up to 76bp for portfolios, which are double sorted on volatility and correlation between 1990 and 2014. Our findings are robust to liquidity issues, bid-ask spread, and limits of arbitrage.
Two additional related research papers have been included into existing free strategy reviews during last 2 week:
#28 – Value and Momentum across Asset Classes
Cooper, Mitrache, Priestley: A Global Macroeconomic Risk Explanation for Momentum and Value
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2768040
Abstract:
Value and momentum returns and combinations of them are explained by their loadings on global macroeconomic risk factors across both countries and asset classes. These loadings describe why value and momentum have positive return premia and why they are negatively correlated. The global macroeconomic risk factor model also performs well in summarizing the cross section of various additional asset classes. The findings identify the source of the common variation in expected returns across asset classes and countries suggesting that markets are integrated.
#198 – Exploiting Term Structure of VIX Futures
Donninger: Forecasting the VIX to Improve VIX-Derivatives Trading
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2771019
Abstract:
Konstantinidi et. al. state in their broad survey of Volatility-Index forecasting: "The question whether the dynamics of implied volatility indices can be predicted has received little attention". The overall result of this and the quoted papers is: The VIX is too a very limited extend (R2 is typically 0.01) predictable, but the effect is economically not significant. This paper confirms this finding if (and only if) the forecast horizon is limited to one day. But there is no practical need to do so. One can – and usually does – hold a VIX Future or Option several trading days. It is shown that a simple model has a highly significant predictive power over a longer time horizon. The forecasts improve realistic trading strategies.
