New strategies:
#400 – Accruals Effect Combined with Price Momentum
Period of rebalancing: monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1965 – 2015
Indicative performance: 10.43%
Estimated volatility: 10.82%
Source paper:
Xu, Fangming and Zeng, Cheng and Zheng, Liyi: Persistence of Earnings Components and Price Momentum
https://ssrn.com/abstract=3207098
Abstract:
This study investigates whether the negligence of different persistent levels of earnings components could influence the performance of stock price momentum. We find that accruals and cash flows contain incremental information beyond what are revealed by past returns. Stocks with high accruals (or low cash flows) generate higher momentum payoffs than low accruals (or high cash flows) stocks, and the additional momentum payoffs are mostly attributable to abnormal accruals and net distributions to equity. While our results primarily support the earnings fixation explanation, further analysis suggests that momentum strategies based on growth in net operating assets generate comparable profits. Lastly, the performance of our accrual- (cash-flow-) momentum strategies is not sensitive to the limit-to-arbitrage factors and cannot be explained by various risk models.
#401 – Carry On – Enhanced Carry Strategy
Period of rebalancing: monthly
Markets traded: currencies
Instruments used for trading: futures, forwards, swaps, CFDs
Complexity: Very complex strategy
Bactest period: 1984-2017
Indicative performance: 2.03 %
Estimated volatility: 2.47%
Source paper:
Czasonis, Megan and Pamir, Baykan and Turkington, David: Carry On
https://ssrn.com/abstract=3178314
Abstract:
The carry trade in foreign currencies is known for delivering positive returns on average, and for occasionally suffering large losses. While these characteristics prevail on average across time and across currency pairs, we find that interest rate differentials on their own are not sufficient to identify conditions in which currencies exhibit these return and risk attributes reliably. We use three variables – valuation, volatility and crowding – to identify time periods and cross-sections of currencies in which the carry trade performs best. We document a substantial difference in performance between the carry trade applied to high-volatility versus low-volatility currency pairs. In the full sample from 1984 to 2017, carry in high-volatility pairs has consisted of currencies which are undervalued on average, experience greater swings in valuation, and have boom and bust cycles aligned with investor crowding. This finding is consistent with the notion that carry represents a risk premium. Carry in low-volatility pairs has the opposite characteristics. Though both strategies performed well prior to the 2008 financial crisis, only carry in high-volatility pairs has worked since.
New research papers related to existing strategies:
#399 – When Short Sellers and Corporate Insiders Agree on Stock Pricing
Ma, Martin, Ringgenberg, Zhou: An Information Factor: Can Informed Traders Make Abnormal Profits?
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3205660
Abstract:
We propose an information factor that combines informed stock buying of firm insiders and informed selling of short sellers and option traders. The information factor strongly predicts future stock returns — it earns an average monthly return of 1.24%, substantially outperforming existing factors including momentum. Moreover, it generates a monthly alpha of 1.22%, suggesting significant compensation for information acquisition and processing. The information factor drives hedge fund returns in both the time-series and cross-section. A one standard deviation increase in the information factor is associated with a 0.65% increase in the value of aggregate hedge fund portfolios. In the cross-section, funds with high fund information skill (FIS), measured as the covariation between fund returns and the information factor, outperform low-FIS funds by 0.43% per month. The results suggest that skill in generating and processing information is an important source of hedge fund returns.
And two additional related research papers have been included into existing free strategy reviews during last 2 weeks:
What Works (and Doesn't Work) in Cryptocurrencies
Yang: Behavioral Anomalies in Cryptocurrency Markets
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3174421
Abstract:
If behavioral biases explain asset pricing anomalies, they should also materialize in cryptocurrency markets. I test more than 20 stock return anomalies based on daily cryptocurrency data, and document strong evidence of price momentum. Unlike stock markets, price reversal and risk-based anomalies are weak, controlling for market and size. Cryptocurrency anomalies can be explained by behavioral theories that place more emphasis on the role of speculators than fundamental traders.
Enhanced Factor Portfolios
Blitz, Vidojevic: The Characteristics of Factor Investing
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3206798
Abstract:
We dissect the performance of factor-based equity portfolios using a characteristics-based multi-factor expected return model. We show that generic single-factor portfolios, which invest in stocks with high scores on one particular factor, are sub-optimal, because they ignore the possibility that these stocks may be unattractive from the perspective of other factors. We also show that differences in performance between (i) integrated and mixed-sleeve multi-factor portfolios, (ii) small-cap and large-cap factor portfolios, and (iii) equal and value-weighted factor portfolios can be fully attributed to the differences in their factor characteristics. We conclude that efficient factor investing requires a recognition and understanding of how factor characteristics drive portfolio returns.
