New strategies:
#374 – Political Uncertainty and Commodity Prices
Period of rebalancing: Quarterly
Markets traded: commodities
Instruments used for trading: futures, forwards, swaps, CFDs, ETFs
Complexity: Simple strategy
Bactest period: 1960 – 2017
Indicative performance: 6.40%
Estimated volatility: not stated
Source paper:
Hou, Kewei and Tang, Ke and Zhang, Bohui, Political Uncertainty and Commodity Prices
https://ssrn.com/abstract=3064295
Abstract:
Using a comprehensive sample of 87 commodities, we examine the effect of political uncertainty on commodity prices. We show that political uncertainty surrounding U.S. presidential elections has a significant negative impact on commodity prices worldwide, likely due to shrinking demand before the elections. On average, commodity prices decline by 6.4% in the quarter leading up to U.S. elections. This effect holds true for gold, and is stronger for close elections and elections during recessions. On the other hand, political uncertainty in commodity producing countries with little demand pushes commodity prices up by 5.4% in the quarter before their national elections.
#375 – Cross-Section of Stock Returns Predicted by Commitment of Traders Information
Period of rebalancing: Weekly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Very complex strategy
Bactest period: 2006 – 2017
Indicative performance: 25.65%
Estimated volatility: 27.86%
Source paper:
Ho, Steven Wei and Lauwers, Alexandre R.: Is There Smart Money? How Information in the Futures Market Is Priced into the Cross-Section of Stock Returns with Delay
https://ssrn.com/abstract=3077802
Abstract:
We document a new empirical phenomenon in which the positions of the Managed Money (MM), who are sophisticated speculators in the commodity futures market, as disclosed by the CFTC Disaggregated Commitment of Traders (DCOT) reports, can predict the stock returns of commodity producers in subsequent weeks. Specifically, if the DCOT reports there is increase in long position, or decrease in short position, or increase in net position, or increase in the ratio of long over short position of MM, then the stock price of producers of the same commodity would subsequently increase. This finding is robust to a variety of choices of measures and weighting schemes, and is more pronounced during non-NBER recession periods. The results are also more pronounced in firms with higher information asymmetry, that is, those with higher analyst dispersion and higher stock volatility. A trading strategy based on this finding can generate a significant alpha of around 38% per annum. Our finding further challenges the efficient market hypothesis. We find that the positions of MM have predictive power, though positions of producers (commercial hedgers) do not.
New research papers related to existing strategies:
#175 – Pairs Trading on Intraday Basis
Simonson: High-Frequency ETF Pairs Trading
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3092739
Abstract:
In this paper we examine the effectiveness of modeling a paris-traded ETF portfolio as an Ornstein-Uhlenbeck process. Using ETF pairs that have similar references indexes, we apply maximum likelihood estimation to historical data in order to optimize trading signals for two strategies. Using this information, we test the optimal trading rules using intraday price observations over a variety of trading periods ranging from 5 days to 42 days. Our results have shown that the sample of ETF pairs-traded portfolios selected exhibit mean-reversion properties that are well modeled as an Ornstein-Uhlenbeck process. We have found that while higher total trading returns were correlated with shorter optimization and trading periods, they also carried considerable risk and as such more stable results were found using longer optimization and trading windows.
Two additional related research papers have been included into existing free strategy reviews during last 2 weeks:
Related mainly to equity based momentum strategies:
Ruenzi, Weigert: Momentum and Crash Sensitivity
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3092546
Abstract:
This paper proposes a risk-based explanation of the momentum anomaly on equity markets. Regressing the momentum strategy return on the return of a self-financing portfolio going long (short) in stocks with high (low) crash sensitivity in the USA from 1963 to 2012 reduces the momentum effect from a highly statistically significant 11.94% to an insignificant 1.84%. We find additional supportive out-of sample evidence for our risk-based momentum explanation in a sample of 23 international equity markets.
Is Bitcoin market efficient ? A new research study analyzes simple calendar effects:
Baur, Cahill, Godfrey, Liu: Bitcoin Time-of-Day, Day-of-Week and Month-of-Year Effects in Returns and Trading Volume
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3088472
Abstract:
There is a large literature that reports time-specific anomalies in equity markets such as the Monday effect, the January effect and the Halloween effect. This study is the first to report intra-day time-of-day, day-of-week, and month-of-year effects for Bitcoin returns and trading volume. Using more than 15 million price and trading volume observations from seven global Bitcoin exchanges reveal time-varying effects but no consistent or persistent patterns across the sample period. The results suggest that Bitcoin markets are efficient.
