New strategies:
#406 – Cash-Based Operating Proï¬tability
Period of rebalancing: yearly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1963 – 2014
Indicative performance: 5.28%
Estimated volatility: 11.13%
Source paper:
Ball, Ray and Gerakos, Joseph J. and Linnainmaa, Juhani T. and Nikolaev , Valeri V.: Accruals, Cash Flows, and Operating Profitability in the Cross Section of Stock Returns
https://ssrn.com/abstract=2587199
Abstract:
Accruals are the non-cash component of earnings. They represent adjustments made to cash flows to generate a profit measure largely unaffected by the timing of receipts and payments of cash. Prior research uncovers two anomalies: expected returns increase in profitability and decrease in accruals. We show that cash-based operating profitability (a measure that excludes accruals) outperforms measures of profitability that include accruals. Further, cash-based operating profitability subsumes accruals in predicting the cross section of average returns. An investor can increase a strategy's Sharpe ratio more by adding just a cash-based operating profitability factor to the investment opportunity set than by adding both an accruals factor and a profitability factor that includes accruals.
#407 – Timing Betting Against Beta with Small Stocks
Period of rebalancing: monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: very complex strategy
Bactest period: 1989-2018
Indicative performance: 19.00%
Estimated volatility: 13.27%
Source paper:
Zaremba, Adam: Small-Minus-Big Predicts Betting-Against-Beta: Implications for International Equity Allocation and Market Timing
https://ssrn.com/abstract=3227047
Abstract:
We demonstrate a strong relationship between short-term small-firm premium and future low-beta anomaly performance. Rises (declines) in small firm prices temporarily improve (deteriorate) funding conditions, benefiting (impairing) the short-run returns on the low-beta strategy. To investigate this phenomenon, we examine returns on betting-against-beta (BAB) and small-minus-big (SMB) factor portfolios in 24 developed markets for the years 1989–2018. A zero-investment strategy of going long (short) in BAB factors in the quintile of countries with the highest (lowest) three-month SMB return produces a mean return of 1.46% per month. The effect is robust to controlling for major risk factors in equity markets, alternative portfolio construction methods, and subperiod analysis. The predictability of BAB performance by SMB returns is also present in the time-series of individual country returns, forming the ground for effective timing in the low-beta strategies.
New research papers related to existing strategy:
#18 – Liquidity Effect in Stocks
Amihud: Illiquidity and Stock Returns: A Revisit
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3257038
Abstract:
This paper explains and extends my 2002 paper. It presents a return factor of illiquid-minus-liquid stocks, called IML, which provides a time series of the illiquidity premium. The risk-adjusted predicted return on IML is lower in the period that follows my 2002 paper but it is still significant. IML also has the predicted response to market illiquidity shocks.
#118 – Time Series Momentum Effect
Huang, Li, Wang, Zhou: Time-Series Momentum: Is It There?
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3165284
Abstract:
Time-series momentum (TSM) refers to the predictability of the past 12-month return on the next one-month return, and is the focus of several recent influential studies. This paper shows, however, that asset-by-asset time-series regressions reveal little evidence of TSM, both in- and out-of-sample. In a pooled regression, the typically used t-statistic can over-reject the no predictability hypothesis, and three versions of bootstrap-corrected t-statistics show that there is no evidence of TSM. From an investment perspective, although the TSM strategy is known to be profitable, its performance is virtually the same as that of a similar strategy that is based on historical mean and does not require predictability. Overall, the evidence of TSM is weak, particularly for the large cross section of assets.
And two additional related research papers have been included into existing free strategy reviews during last 2 weeks:
#20 – Volatility Risk Premium Effect
Israelov, Tummala: Being Right is Not Enough: Buying Options to Bet on Higher Realized Volatility
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3248500
Abstract:
Speculators who wish to bet on higher future volatility often purchase options to “go long volatility.” Should investors who buy options expect to profit when realized volatility increases? If so, under what conditions? To answer these questions, we conduct an analysis of the relationship between long volatility performance (buying options) and contemporaneous changes in volatility. We find that buying one-month S&P 500 options is only consistently profitable in the highest decile of changes in one-month volatility. Buying options consistently loses money in the lowest seven deciles of changes in volatility. We then study the trade entry and exit timing required to retain the profits from long option positions during significant volatility increases. We find similar results in global equity option markets.
#77 – Beta Factor in Stocks
Liu: Asset Pricing Anomalies and the Low-Risk Puzzle
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3258015
Abstract:
The original observation in Black, Jensen and Scholes (1972) that the security market line is too flat – the beta anomaly – is a driving force behind a number of well-documented cross-sectional asset pricing puzzles. I document that returns to a broad set of anomaly portfolios are negatively correlated with the contemporaneous market excess return. I show that this negative covariance implicitly embeds the beta anomaly in these cross-sectional return puzzles. Taking into account the exposure to the beta anomaly either attenuates or eliminates the economic and statistical significance of the risk-adjusted returns to a large set of asset pricing anomalies.
