New strategies:
#404 – Alpha Momentum in Country and Industry Equity Indexes
Period of rebalancing: monthly
Markets traded: equities
Instruments used for trading: ETFs, futures
Complexity: Complex strategy
Bactest period: 1973 – 2018
Indicative performance: 6.30%
Estimated volatility: 20.02%
Source paper:
Zaremba, Adam and Umutlu, Mehmet and Karathanasopoulos, Andreas: Alpha Momentum and Alpha Reversal in Country and Industry Equity Indexes
https://ssrn.com/abstract=3235350
Abstract:
Do past alphas predict future country and industry returns? Examination of equity indexes from 51 stock markets between 1973 and 2018 allows us to demonstrate new return patterns in the cross-section of country and industry returns. Past short-term (long-term) alphas positively (negatively) predict future returns. These phenomena can be translated into effective international equity allocation strategies, producing economically and statistically significant raw and risk-adjusted returns. The profitability is robust to many considerations, including alternative alpha models, the effect of trading costs, different holding periods, or subsample and subperiod analyses. Also, the alpha momentum and reversal subsume their return-based counterparts. Finally, the alpha-based patterns are particularly pronounced following bull markets and across the markets characterized by high arbitrage constraints, supporting the behavioral explanation of the anomalies.
#405 – Using VIX to Time Options Writing
Period of rebalancing: monthly
Markets traded: equities
Instruments used for trading: options, ETFs
Complexity: Simple strategy
Bactest period: 1995-2018
Indicative performance: 10.88%
Estimated volatility: 11.36%
Source paper:
Malkiel, Burton G. and Rinaudo, Alex and Saha, Atanu: Option Writing: Using VIX to Improve Returns
https://ssrn.com/abstract=3228589
Abstract:
Buy-Write and Put-Write strategies have been shown to match market returns with lower volatility resulting in higher risk-adjusted performance. The strategies benefit from the fact that implied volatility of options is generally higher than actual realized volatility. In this paper we show that this premium is higher at elevated levels of implied volatility (as represented by the VIX index level). Based on this finding we propose a simple conditional strategy in which one sells options at elevated levels of the VIX. Using data from 1990 through 2018, we find that this conditional strategy outperforms both the market and continuous option selling strategies on an absolute and risk-adjusted basis.
New research paper related to existing strategy:
#1 – Asset Class Trend Following
#2 – Asset Class Momentum – Rotational System
#210 – Adaptive Asset Allocation
Keller, Keuning: Breadth Momentum and the Canary Universe: Defensive Asset Allocation (DAA)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3212862
Abstract:
We improve on our Vigilant Asset Allocation (VAA) by the introduction of a separate “canary” universe for signaling the need for crash protection, using the concept of breadth momentum. The amount of cash is now governed by the number of canary assets with bad (non-positive) momentum. The risky part is still based on relative momentum (or relative strength), just like VAA. We call this strategy Defensive Assets Allocation (DAA). The aim of DAA is to lower the average cash (or bond) fraction while keeping nearly the same degree of crash protection as with VAA. Using a very simple model from Dec 1926 to Dec 1970 with only the SP500 index as risky asset, we find an optimal canary universe of VWO and BND (aka EEM and AGG), which turns out to be rather effective also for nearly all our VAA universes, from Dec 1970 to Mar 2018. The average cash fraction of DAA is often less than half that of VAA’s, while return and risk are similar and for recent years even better. The usage of a separate “canary” universe for signaling the need for crash protection also improves the tracking error with respect to the passive (buy-and-hold) benchmark and limits turnover.
And five additional related research papers have been included into existing free strategy reviews during last 2 weeks:
#14 – Momentum Effect in Stocks
Muller, Muller: The Remarkable Relevance of Characteristics for Momentum Profits
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3240609
Abstract:
This paper provides a comprehensive analysis of a large set of momentum enhancing strategies for global equity markets. Our findings reveal the relevance of characteristics in enhancing and explaining momentum after accounting for possible interrelations with idiosyncratic volatility and extreme past returns. Out of a set of eighteen stock characteristics, we find particularly age, book-to-market, maximum daily return, R², information diffusion, and 52-week high price to matter for momentum profits. Overall, and consistent with behavioral explanation attempts, momentum appears to work best for hard-to-value firms with high information uncertainty. There are however substantial cross-country differences with regard to which characteristics truly enhance momentum. Our results imply that the link between idiosyncratic volatility, extreme past returns, and momentum profits itself is unable to comprehensively explain enhanced momentum returns and corroborate the heterogeneity of stock markets around the globe.
#14 – Momentum Effect in Stocks
Abhyankar, Filippou, Garcia-Ares, Haykir: Overcoming Arbitrage Limits: Option Trading and Momentum Returns
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3206873
Abstract:
Returns to cross-sectional momentum in the U.S. equity market, over 1996-2016, are fifty percent lower and statistically insignificant relative to the previous two decades. The decline is linked to larger arbitrage capital flows, lower stock trading costs, and greater investor awareness after publication. During this period stocks with traded options rose to more than seventy percent of all listed stocks. We find strong evidence that the reduction in momentum profits is also related to stock option trading that offers alternate avenues for short sales and information flows that contribute to more efficient stock pricing.
#14 – Momentum Effect in Stocks
Avramov, Hore: Cross-Sectional Factor Dynamics and Momentum Returns
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3033349
Abstract:
This paper proposes and implements an inter-temporal model wherein aggregate consumption and asset-specific dividend growths jointly move with two mean-reverting state variables. Consumption beta varies through time and cross sectionally due to variation in half-lives and stationary volatilities of the dividend signals. Winner (Loser) stocks exhibit high (low) half-lives and stationary volatilities, and thus exhibit high (low) consumption beta commanding high (low) risk-premium. The model also rationalizes the "momentum crashes" phenomenon discussed in Daniel and Moskowitz (2014). High half-lives of dividend signals in Winners keep their consumption betas low long after recovering from a prolonged economic downturn, while low half-lives in Losers make their consumption betas grow rather quickly. Thus, coming out of a recession, the long Winner/short Loser strategy reduces in consumption beta and, hence, risk-premia.
#26 – Value (Book-to-Market) Anomaly
Krause: Risk and Uncertainty in Style Rotation
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3209491
Abstract:
The effectiveness of the VIX index as a leading indicator of style returns has been examined in the finance literature, finding that increases in this “fear index” lead to outperformance of “value” vs “growth” stocks, although the effect has attenuated over time. This study introduces the concept of “uncertainty” as an additional indicator of returns to value, as measured by the CBOE® VVIX (“volatility of volatility”), that that may be considered as a proxy for “uncertainty” in the Knightian sense. Increases in uncertainty (the VVIX index) lead to negative short-term returns to value. Additional macroeconomic variables provide additional incremental information regarding these phenomena.
And a new financial research paper has been published and is related to cryptocurrency trading strategies:
Jo, Park, Shefrin: Bitcoin and Sentiment
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3230572
Abstract:
On the surface, cryptocurrencies share important features in common with high sentiment beta stocks. Baker and Wurgler (2007) identify high sentiment betas with small startup firms that have great growth potential. This paper investigates the degree to which, during the period July 18, 2010 to February 26, 2018, the return to bitcoin displayed the characteristics of a high sentiment beta stock. Using a sentiment-dependent factor model, the analysis indicates that in large measure, bitcoin returns resembled returns to high sentiment beta stocks.
