Two new strategies have been added:

#261 – Trading Commodity Calendar Spreads
#262 – Timing Commodity Factor Portfolios

Three new related research paper have been included into existing strategy reviews. And three additional related research paper have been included into existing free strategy reviews during last 2 weeks.

#21 – Momentum Effect in Commodities
#22 – Term Structure Effect in Commodities

Authors: Zaremba

Title: Strategies Based on Momentum and Term Structure in Financialized Commodity Markets

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2469407

Abstract:

The aim of this paper is to investigate the impact of the financialization of commodity markets on the profitability of strategies based on momentum and term structure. The performance of an array of portfolios from double-sorts on non-commercial traders’ participation, historical returns and term spreads is tested against a risk model. Both strategies reveal better performance in case of commodity markets with low financialization level and generate little profits in the markets with a significant participation of investors. The findings of this study can be used for the purposes of tactical and strategic asset allocation.

Notable quotations from the paper:

…

#12 – Pairs Trading with Stocks

Authors: Xie, Liew, Wu, Zou

Title: Pairs Trading with Copulas

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2383185

Abstract:

Pairs trading is a well-acknowledged speculative investment strategy that is widely used in the financial markets, and distance method is the most commonly implemented pairs trading strategy by traders and hedge funds. However, this approach, which can be seen as a standard linear correlation analysis, is only able to fully describe the dependency structure between stocks under the assumption of multivariate normal returns. To overcome this limitation, we propose a new pairs trading strategy using copula modeling technique. Copula allows separate estimation of the marginal distributions of stock returns as well as their joint dependency structure. Thus, the proposed new strategy, which is based on the estimated optimal dependency structure and marginal distributions, can identify relative undervalued or overvalued positions with more accuracy and confidence. Hence, it is deemed to generate more trading opportunities and profits. A simple one-pair-one-cycle example is used to illustrate the advantages of the proposed method. Besides, a large sample analysis using the utility industry data is provided as well. The overall empirical results have verified that the proposed strategy can generate higher profits compared with the conventional distance method. We argue that the proposed trading strategy can be considered as a generalization of the conventional pairs trading strategy.

Notable quotations from the paper:

…

#5 – FX Carry Trade
#8 – FX Momentum

Authors: Olszweski, Zhou

Title: Strategy diversification: Combining momentum and carry strategies within a foreign exchange portfolio

Link: http://apps.olin.wustl.edu/faculty/zhou/O_Z_JHDF_2014.pdf

Abstract:

Hedge funds, such as managed futures, typically use two different types of trading strategies: technical and macro/fundamental. In this article, we evaluate the impact of combining the two strategies, and focus on, in particular, two common foreign exchange trading strategies: momentum and carry. We find evidence that combining the strategies offers a significant improvement in risk-adjusted returns. Our analysis, which uses data spanning 20 years, highlights the potential benefits of achieving strategy-level diversification.

Notable quotations from the paper:

…

#12 – Pairs Trading with Stocks
#55 – Pairs Trading with Country ETFs

Authors: Leung, Li

Title: Optimal Mean Reversion Trading with Transaction Costs and Stop-Loss Exit

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2222196

Abstract:

Motivated by the industry practice of pairs trading, we study the optimal timing strategies for trading a mean-reverting price spread. An optimal double stopping problem is formulated to analyze the timing to start and subsequently liquidate the position subject to transaction costs. Modeling the price spread by an Ornstein-Uhlenbeck process, we apply a probabilistic methodology and rigorously derive the optimal price intervals for market entry and exit. As an extension, we incorporate a stop-loss constraint to limit the maximum loss. We show that the entry region is characterized by a bounded price interval that lies strictly above the stop-loss level. As for the exit timing, a higher stop-loss level always implies a lower optimal take-profit level. Both analytical and numerical results are provided to illustrate the dependence of timing strategies on model parameters such as transaction cost and stop-loss level.

One new strategy has been added:

#260 – Trend Following in Commodity Calendar Spreads

Six new related research paper have been included into existing strategy reviews. And four additional related research paper have been included into existing free strategy reviews during last 2 weeks.

#44 – Paired Switching

Authors: Schizas, Thomakos

Title: Market timing using asset rotation on exchange traded funds: a meta-analysis on trading performance

Link: http://businessperspectives.org/journals_free/imfi/2013/imfi_en_2013_02cont_Schizas.pdf

Abstract:

The ultimate goal of any “paper” investment strategy is to achieve real-life profitability. This paper measures the performance of a trading rule based on the relative pricing and relative volatility of a rotation strategy between two assets, using data from passive ETFs. To avoid problems of pair selection we work with meta-data obtained after the evaluation of a large number of 351 pairs of ETFs. In this way the authors analyze the performance of the proposed strategy on the cross-section of different ETFs. The results show that rotation trading, as applied in this paper, offers advantages even when the simplest model is used in generating trading signals. Furthermore, the authors find that the differences in the actual mean returns (over the evaluation period), the correlation of the pair components and to (a lesser extend) the volatilities of the ETFs can explain the success of the rotation strategies.

Notable quotations from the paper:

…

Related research paper has been included into existing free strategy review.

#100 – Trading WTI/BRENT Spread

Authors: Lubnau

Title: Spread trading strategies in the crude oil futures market

Link: http://econstor.eu/bitstream/10419/96520/1/783913591.pdf

Abstract:

This article explores whether common technical trading strategies used in equity markets can be employed profitably in the markets for WTI and Brent crude oil. The strategies tested are Bollinger Bands, based on a mean-reverting hedge portfolio of WTI and Brent. The trading systems are tested with historical data from 1992 to 2013, representing 22 years of data and for various specifications. The hedge ratio for the crude oil portfolio is derived by using the Johansen procedure and a dynamic linear model with Kalman filtering. The significance of the results is evaluated with a bootstrap test in which randomly generated orders are employed. Results show that some setups of the system are able to be profitable over every five-year period tested. Furthermore they generate profits and Sharpe ratios that are significantly higher than those of randomly generated orders of approximately the same holding time. The best results with some Sharpe ratios in excess of three, are obtained when a dynamic linear model with Kalman filtering and maximum likelihood estimates of the unknown variance of the state equation is employed to constantly update the hedge ratio of the portfolio. The results indicate that the crude oil market may not be weak-form efficient.

Notable quotations from the paper:

…

Related research paper has been included into existing free strategy review.

#33 – Post-Earnings Announcement Effect

Authors: Kwon, Kim

Title: Investment Horizon of Shareholders and Post-Earnings-Announcement Drift

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2545189

Abstract:

We hypothesize that post-earnings-announcement drift (PEAD) is caused by underreaction of long-term investors since they do not pay much attention to short-term events. Consistent with the hypothesis, empirical observations show that stocks mostly held by long-term investors exhibit strong PEAD, while stocks mostly held by short-term investors does not. The results are still robust even after transaction costs, investor recognition, temporal inattention, and reversal in earnings surprises are controlled for.

Notable quotations from the paper:

…