New strategies:
#369 – Earnings Acceleration Effect in Stocks
Period of rebalancing: Daily
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1972 – 2015
Indicative performance: 23.87%
Estimated volatility: 13.81%
Source paper:
He, Narayanamoorthy: Earnings Acceleration and Stock Returns
https://ssrn.com/abstract=3057632
Abstract:
We document that earnings acceleration, defined as the quarter-over-quarter change in earnings growth, has significant explanatory power for future excess returns. These excess returns are robust to a wide range of previously documented anomalies as well as a battery of risk controls. The magnitude of the excess returns (1.8% in a month-long window) is comparable to those from book-to-market, post-earnings announcement drift and gross profitability anomalies. The future return predictability appears to arise because of the market missing predictable implications of earnings acceleration for earnings growth two and three quarters hence. Finally, the excess returns from the basic earnings acceleration trading strategy can be enhanced further by nearly 45% by focusing on specific patterns of earnings acceleration.
#370 – Value-Growth Timing
Period of rebalancing: Monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1972-2014
Indicative performance: 7.19%
Estimated volatility: 19.61%
Source paper:
Baba Yara, Fahiz M. and Boons, Martijn and Tamoni, Andrea: Value Timing: Risk and Return Across Asset Classes
https://ssrn.com/abstract=3054017
Abstract:
Returns to value strategies in individual equities, commodities, currencies, global government bonds and stock indexes are predictable by the value spread. The value spread captures the strength of the value signal in the long relative to the short portfolio of a value strategy. We show that common and asset-class-specific components of the value spread contribute equally to this predictability. Return variation due to common value is closely associated to standard predictors of risk premia, but is at odds with models that exclusively generate a value premium in equities. Return variation due to specific value presents another challenge for asset pricing models. A number of value timing and rotation strategies shows that investors can benefit from the value spread in real-time.
New research papers related to existing strategies:
#28 – Value and Momentum across Asset Classes
Cherkezov, Lohre, Protchenko, Raol: Investing in a Multi-Asset Multi-Factor World
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3048904
Abstract:
In this article, we advance the use of factor investing across multiple asset classes. It turns out that style factors well established in the equity domain – such as value, momentum or quality – do extend to other asset classes as well. Even more so, multi-asset multi-factors significantly expand the investment opportunity set relative to a traditional multi-asset universe. Seeking to exploit this potential, we put forward an innovative diversified risk parity strategy that is designed to strive for maximum diversification in the multi-asset multi-factor world. To illustrate the strategy’s merits, we investigate its stylized facts vis-à-vis more standard allocation approaches.
Two additional related research papers have been included into existing free strategy reviews during last 2 weeks:
A new financial research paper sheds some light on a long debate abour market efficiency:
Bouchaud, Ciliberti, Lamperiere, Majewski, Seager, Ronia: Black Was Right: Price Is Within a Factor 2 of Value
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3070850
Abstract:
We provide further evidence that markets trend on the medium term (months) and mean-revert on the long term (several years). Our results bolster Black’s intuition that prices tend to be off roughly by a factor of 2, and take years to equilibrate. The story behind these results fits well with the existence of two types of behaviour in financial markets: “chartists”, who act as trend followers, and “fundamentalists”, who set in when the price is clearly out of line. Mean-reversion is a self-correcting mechanism, tempering (albeit only weakly) the exuberance of financial markets.
A new financial research paper related to FX Momentum strategies:
Eriksen: Cross-Sectional Return Dispersion and Currency Momentum
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3001681
Abstract:
This paper studies the relation between global foreign exchange (FX) return dispersion risk and the cross-section of currency momentum returns. We find robust empirical evidence that FX return dispersion is a priced risk factor and that it contains information beyond traditional factors. Currencies with high past returns (winners) load positively on dispersion innovations, whereas currencies with low past returns (losers) load negatively. Intuitively, investors demand a premium for holding past winners as they perform poorly in periods with unexpectedly low cross-sectional dispersion, while past losers provide insurance against periods with disappearing dispersion.
