New strategies:
#329 – Portfolio Hedging Using VIX Options
Period of rebalancing: monthly
Markets traded: bonds, equities
Instruments used for trading: ETFs, options
Complexity: Moderately complex strategy
Bactest period: 2008-2013
Indicative performance: 8.63%
Estimated volatility: 8.44%
Source paper:
Paoloni: A Study in Portfolio Diversification Using VIX Options
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2792358
Abstract:
The search for dependable, low-cost portfolio tail protection or hedge from exogenous events such as the 1987 crash, the 2000 dot-com bubble, the 2008 credit crisis and the 2011 European crisis continues. This study assesses the performance of a systematic VIX call buying strategy with a defined cost to hedge an equity portfolio from systemic risk. A portfolio manager must weigh these costs against those of hedging strategiesthat have potentially undefinable costs, for example, protective puts or shorting equity index futures. The analysis shows that a passive allocation to VIX calls has proven effective in large drawdown periods and can be accomplished by spending a relatively small defined percentage of capital when the hedge is not needed. The study applies a set of fixed rules to empirical data with the goal of optimizing ex-post the moneyness and expiry of VIX call options over the period studied. For the period of analysis, the systematic purchase of properly placed VIX calls tends to provide sufficient protection in tail risk events for minimal cost when hedging is not needed.
#330 – Pre-Earnings Announcement Drift
Period of rebalancing: daily
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1991-2014
Indicative performance: 39.00%
Estimated volatility: 45.02%
Source paper:
Ertan, Karolyi, Kelly, Stoumbos: Pre-Earnings Announcement Over-Extrapolation
https://mendoza.nd.edu/assets/193974/2016_spring_finance_seminar_series_peter_kelly_paper_updated_3_22_2016.pdf
Using earnings announcements as our experimental setting, we uncover evidence that individual investors over-extrapolate from past earnings announcement returns. Investors become overly optimistic about future earnings and are more likely to purchase a ï¬rm’s stock immediately before the upcoming earnings announcement if recent earnings announcement returns are high. We ï¬nd pricing effects around earnings announcements consistent with this behavior: A value-weighted portfolio based on pre-earnings announcement purchases earns over 17 basis points per day and a value-weighted portfolio based on a post-earnings reversal earns about 13 basis points per day.
New research paper related to existing strategies:
#246 – Trading on the Dividend Paydate
Hartzmark, Solomon: The Dividend Disconnect
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2876373
Abstract:
We show that investors trade as if they consider dividends and capital gains in separate mental accounts, without fully appreciating that dividends come at the expense of price decreases. Investors trade differently in response to each component – trading patterns such as the disposition effect are driven by price changes, with dividends being ignored or downweighted. Investors hold dividend-paying stocks longer, and are less sensitive to price changes, consistent with dividends being valued as a separate desirable attribute of stocks. The demand for dividend-paying stocks is higher when interest rates and recent market returns are lower, consistent with investors comparing dividends to other income streams and capital gains. Investors spend the proceeds of each component differently – mutual funds and institutions rarely reinvest dividends into the stocks from which they came, but instead purchase other stocks. This leads to predictable marketwide price increases on days of large aggregate dividend payouts, including stocks not paying dividends.
Three additional related research papers have been included into existing free strategy reviews during last 2 week:
#5 – FX Carry Trade
Falconio: Carry Trades and Monetary Conditions
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2854134
Abstract:
This paper investigates the relation between monetary conditions and the excess returns arising from an investment strategy that consists of borrowing low-interest rate currencies and investing in currencies with high interest rates, so-called "carry trade". The results indicate that carry trade average excess return, Sharpe ratio and 5% quantile differ substantially across expansive and restrictive conventional monetary policy before the onset of the recent financial crisis. By contrast, the considered parameters are not affected by unconventional monetary policy during the financial crisis.
#118 – Time Series Momentum Effect
Till: What are the Sources of Return for CTAs and Commodity Indices? A Brief Survey of Relevant Research
http://www.oxfordstrat.com/coasdfASD32/uploads/2016/03/Sources-of-Return-for-CTAs.pdf
Abstract:
This survey paper will discuss the (potential) structural sources of return for both CTAs and commodity indices based on a review of empirical research articles from both academics and practitioners. The paper specifically covers (a) the long-term return sources for both managed futures programs and for commodity indices; (b) the investor expectations and the portfolio context for futures strategies; and (c) how to benchmark these strategies.
Plus an interesting new academic paper related to an actual issue – a high valuation of us equities:
Dimitrov, Jain: Shiller's CAPE: Market Timing and Risk
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2876644
Abstract:
Robert Shiller shows that Cyclically Adjusted Price to Earnings Ratio (CAPE) is strongly associated with future long-term stock returns. This result has often been interpreted as evidence of market inefficiency. We present two findings that are contrary to such an interpretation. First, if markets are efficient, returns on average, even when conditional on CAPE, should be higher than the risk-free rate. We find that even when CAPE is in its ninth decile, future 10-year stock returns, on average, are higher than future returns on 10-year Treasurys. Thus, the results are largely consistent with market efficiency. Only when CAPE is very high, say, CAPE is in the upper half of the tenth decile (CAPE higher than 27.6), future 10-year stock returns, on average, are lower than those on 10-year U.S. Treasurys. Second, we provide a risk-based explanation for the association between CAPE and future stock returns. We find that CAPE and future stock returns are positively associated with future stock market volatility. Overall, CAPE levels do not seem to reflect market inefficiency and do reflect risk (volatility).
