New strategies:
#382 – The 52-Week High and Short-Term Reversal in Stock Returns
Period of rebalancing: Monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1967 – 2015
Indicative performance: 14.65%
Estimated volatility: 15.83%
Source paper:
Zhu, Zhaobo and Sun, Licheng and Stivers, Chris T. and Zhang, Kai: Information Percolation, the 52-Week High, and Short-Term Reversal in Stock Returns
https://ssrn.com/abstract=3092325
Abstract:
We study the relation between short-term reversal in monthly stock returns and the 52-week high in stock prices. We find strong evidence that short-term reversal strategies are most profitable when implemented on stocks that are far away from the 52-week high. The apparent lack of profitability by short-term reversal portfolios for stocks trading near their 52-week highs are due to similar positive returns earned by both past 1-month winners and losers. We compare competing hypotheses on the 52-week high and find that our results are most compatible with the information percolation theory when it is combined with investor inattention.
#383 – Moving Average Strategies for Cryptocurrencies
Period of rebalancing: Daily
Markets traded: cryptos
Instruments used for trading: cryptos
Complexity: Simple strategy
Bactest period: 2013 – 2018
Indicative performance: 20.85%
Estimated volatility: 8.51%
Source paper:
Detzel, Andrew L. and Liu, Hong and Strauss, Jack and Zhou, Guofu and Zhu, Yingzi, Bitcoin: Predictability and Profitability via Technical Analysis
https://ssrn.com/abstract=3115846
Abstract:
In this paper, we document that returns on Bitcoin, while largely unpredictable by macroeconomic variables, are predictable by 5- to 100-day moving averages (MAs) of its prices, both in- and out-of-sample. Simple trading strategies based on the MAs significantly outperform a buy-and-hold benchmark with a Sharpe ratio already above two. The moving average strategies generate substantial alpha and utility gains, boost annualized Sharpe ratios by 0.2 to 0.6 and significantly reduce the severity of Bitcoin drawdowns. We provide a novel equilibrium model that demonstrates, in the absence of cash flows, rational learning leads to predictability and trading with use of different MA strategies. During the recent dot.com period, the fundamentals of new tech stocks were difficult to assess. We show the same technical trading strategies also outperform the buy-and-hold benchmark in a ten-year window surrounding the NASDAQ peak.
New research papers related to existing strategies:
#247 – Value Effect within Countries v2
Zaremba, Szcygielski: And the Winner Is…A Comparison of Valuation Measures for Country Asset Allocation
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3114803
Abstract:
The authors evaluate and compare the usefulness of various valuation ratios for country selection. To this end, the performance of 73 national equity indices is investigated for the period 1996 to 2017. The EBITDA-to-EV multiple is the best predictor of performance and outperforms other metrics. An equal-weighted portfolio that is long (short) in the tertile of countries with the highest (lowest) EBITDA-to-EV ratio produces a mean monthly return of 0.69% and a Sharpe ratio of 0.81. These are more than double the Sharpe ratios obtained from using traditional metrics such as the book-to-market ratio or dividend yield. Two major drawbacks of inter-country value strategies are identified: 1) payoffs are derived predominantly from emerging and frontier markets and 2) profitability has significantly declined in the last decade.
Two additional related research papers have been included into existing free strategy reviews during last 2 weeks:
#5 – FX Carry Trade
Orlov: Solvency Risk Premia and the Carry Trades
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3116031
Abstract:
This paper shows that currency carry trades can be rationalized by the time-varying risk premia originating from the sovereign solvency risk. We find that solvency risk is a key determinant of risk premia in the cross section of carry trade returns, as its covariance with returns captures a substantial part of the cross-sectional variation of carry trade returns. Importantly, low interest rate currencies serve as insurance against solvency risk, while high interest rate currencies expose investors to more risk. The results are not attenuated by existing risks and pass a broad range of various robustness checks.
#12 – Pairs Trading with Stocks
Farago,Hjalmarsson: Stock Price Co-Movement and the Foundations of Pairs Trading
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3114058
Abstract:
We study the theoretical implications of cointegrated stock prices on the profitability of pairs trading strategies. If stock returns are fairly weakly correlated across time, cointegration implies very high Sharpe ratios. To the extent that the theoretical Sharpe ratios are "too large," this suggests that either (i) cointegration does not exist pairwise among stocks, and pairs trading profits are a result of a weaker or less stable dependency structure among stock pairs, or (ii) the serial correlation in stock returns stretches over considerably longer horizons than is usually assumed. Empirically, there is little evidence of cointegration, favoring the first explanation.
