Quantpedia Premium Update – 18th October

New strategies:

#791 – Institutional Equity Momentum in China

Period of rebalancing: Monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Backtest period: 2000-2020
Indicative performance: 21.60%
Estimated volatility: 24.22%

Source paper:

Du, Jun and Huang, Dashan and Liu, Yu-Jane and Shi, Yushui and Subrahmanyam, Avanidhar and Zhang, Huacheng: Retail Investors and Momentum
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4163257
Abstract:
We explore the link between momentum and retail investing via an identification strategy in China, where retail investors dominate. We propose that due to a roundlot restriction, small retail investors are less likely to hold and trade stocks with high nominal prices, and find supporting evidence. We then show that while there is no momentum in the Chinese market on aggregate, there is indeed strong momentum in high-priced stocks. Short-term reversals are stronger in low-priced stocks even after controlling for illiquidity. Mutual fund holdings enhance momentum. Small investor participation increases and momentum weakens following splits in high-priced stocks. Taken together, the results support the notion that short-horizon retail trades contribute to short-term reversals, and attenuate momentum arising from institutional underreaction to long-lived information.

#792 – Retail Equity Reversal in China

Source paper:

#793 – Sovereign CDS Currency Factor

Period of rebalancing: Monthly
Markets traded: currencies
Instruments used for trading: CFDs, forwards, futures, swaps
Complexity: Simple strategy
Backtest period: 2007-2021
Indicative performance: 5.00%
Estimated volatility: 5.74%

Source paper:

Calice, Giovanni and Lin, Ming-Tsung: Sovereign Momentum Currency Returns
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4117561
Abstract:
We study the relationship between cross-sectional sovereign credit risk and currency spot prices. We find that past sovereign credit risk, measured by sovereign credit default swap (CDS) spreads, predict future currency spot returns. In particular, we document a significant crosssectional currency portfolio spread in excess of the risk-free rate of return (up to 9.4% p.a.) between the highest and the lowest quintile sovereign CDS spread. These results suggest a new profitable currency return strategy based on sovereign credit risk.

#794 – 24-Hour Reversal in Cryptocurrencies

Period of rebalancing: Intraday
Markets traded: cryptocurrencies
Instruments used for trading: cryptocurrencies
Complexity: Simple strategy
Backtest period: 2018-2021
Indicative performance: 53.8%
Estimated volatility: 15.28%

Source paper:

Fracassi, Cesare and Kogan, Shimon: Pure Momentum in Cryptocurrency Markets
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4138685
Abstract:
Momentum is one of the most widespread, persistent, and puzzling phenomenon in asset pricing. The prevailing explanation for momentum is that investors under-react to new information, and thus asset prices tend to drift over time. We use a unique feature of cryptocurrency markets: the fact that they are open 24/7, and report returns over the last 24 hours. Thus, the one-day return is subject to predictable fluctuations based on the removal of lagged information. We show that investors respond positively to changes in reported returns that are unrelated to any new release of information, or change in the asset fundamentals. We call this behavioral anomaly “Pure Momentum”.

#795 – Lunar Monthly Effect in Chinese Stocks

Period of rebalancing: Monthly
Markets traded: equities
Instruments used for trading: CDFs, ETFs, funds, futures
Complexity: Simple strategy
Backtest period: 1994-2019
Indicative performance: 4.46%
Estimated volatility: 5.08%

Liang, Xiaobo and Liu, Qianqiu and Zebedee, Allan A.: One Country, Two Calendars: Lunar January Effect in China’s A-share Stock Market
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4209010
Abstract:
In this paper, we examine the January effect in China’s A-share stock market from January 1995 to December 2019 using both the solar and lunar calendars. We find consistent with the existing literature the absence of a traditional January effect in the solar calendar; however, we observe a strong January effect in the lunar calendar. The effect is much stronger in small firms. We demonstrate that the tax-loss selling and window dressing hypotheses cannot explain the turn-of-the-year effect in China. Instead, the turn-of-the-year effect in trading volume and buy orders help to explain the strong lunar January effect. As a falsification test, we examine the B-share market that is predominantly composed of foreign investors and find no evidence of the lunar January effect. Our results show that Chinese financial markets are more closely aligned with the traditional lunar calendar than the standard solar calendar.

New research papers related to existing strategies:

#460 – ESG Level Factor Investing Strategy

Grim, Douglas and Renzi-Ricci, Giulio and Madamba, Anna: Asset Allocation with ESG Preferences: Efficiently Blending Value with Values
https://ssrn.com/abstract=4176634
Abstract:
The explosion of interest in ESG investing has yielded a number of quantitative frameworks that seek to incorporate non-pecuniary ESG preferences into conventional multi-asset portfolio optimization models. In this article, the authors specify an accessible approach that allows investors to simultaneously optimize for both pecuniary preferences (such as systematic, factor, and active risk aversion) and non-pecuniary ESG tastes in a way that avoids “one size fits all” solutions and arbitrary portfolio decisions. Using case studies, they find evidence that the strength of non-pecuniary desires along with both pecuniary expectations and risk preferences are important determinants of the optimal portfolio choice.

Dumitrescu, Ariadna and Zakriya, Mohammed and Jarvinen, Jesse: Hidden Gem or Fool’s Gold: Can Passive ESG Etfs Outperform the Benchmarks?
https://ssrn.com/abstract=4185263
Abstract:
Using a unique and extensive dataset of 121 socially responsible investing (SRI) equity exchange-traded funds (ETFs) from January 2010 to December 2020, this study examines how passive SRI ETFs perform compared with their non-SRI benchmarks composed of S&P500 ETFs. Over the full sample period, our results show that an equally weighted SRI ETF portfolio underperforms its benchmark portfolio. Notably, we do not find significant differences in the two portfolios’ performance in the second half of our sample period. However, in the last two years, the SRI ETF portfolio significantly outperforms the benchmark. For the SRI investment strategies, we show that positive screening (or inclusion) rather than negative screening (or exclusion) can beat the benchmark portfolio. In particular, environmental inclusion screen provides significantly higher abnormal returns. Finally, we find that SRI ETFs’ performance can be explained by increasing industry competition and declining market concentration.

#425 – Impact of Overnight Returns and Daytime Reversals to Future Stock Returns

Barardehi, Yashar and Bogousslavsky, Vincent and Muravyev, Dmitriy: What Drives Momentum and Reversal? Evidence from Day and Night Signals
https://ssrn.com/abstract=4069509
Abstract:
News mostly drive overnight returns, whereas investors’ trading mostly drives intraday returns. We use this fact to test theories of momentum and reversal with a sample of intraday and overnight return spanning 1926 to 2019. Portfolios formed on past intraday returns display short-term reversal and momentum without long-term reversal. In contrast, portfolios formed on past overnight returns display only long-term reversal. These results are consistent with underreaction theories of momentum, where investors underreact to the information conveyed by the trades of other investors.

#343 – Impact of Macro News on PEAD Strategy
#470 – Macroeconomic Announcement Beta Strategy
#471 – Macroeconomic Announcement Beta Reversal

Wang, Qingwei and Cheema, Arbab and Eshraghi, Arman: Macroeconomic News and Price Synchronicity
https://ssrn.com/abstract=4209317
Abstract:
Stock price synchronicity is a critical consideration for asset allocation, risk assessment, and hedging decision. We present novel evidence that individual stock returns comove more persistently on certain days of the week. Specifically, we show that release of macroeconomic news on Mondays, which typically see fewer announcements, leads to such stronger comovement, and that this is distinct from the Monday effect typically discussed in the literature. This synchronicity is more pronounced among large, old and low volatility firms, in both up- and down-market conditions. We argue this effect is partly due to ‘simultaneous contrast’, i.e., perception of stimulus depending on its surrounding environment. Monday announcements have a larger impact just as thunder in a quiet night sounds louder. Our findings are robust after controlling for day-of-the-week effects, economic uncertainty, risk aversion, investor sentiment, short-selling constraints and proxies for attention to news.

#714 – Illiquidity Factor in China

Han, Chunmao: Trading Volume, Anomaly Returns and Noise Trader Risk in China
https://ssrn.com/abstract=4169725
Abstract:
We document trading volume’s amplification effect on trading friction anomalies in the Chinese market. Unlike the uncertain role in different situations in the U.S. market, trading volume in the Chinese market represents noise trading activity rather than efficiency. At the market level, the anomaly returns are higher during periods of higher trading activity; at the individual stock level, the anomalies constructed by high turnover stocks have higher returns. We use noise trader risk to explain the contradiction whereby trading volume does not promote efficiency in the retail investor-dominated Chinese market. Further, we propose a volume-weighted portfolio to utilize trading volume’s amplification effect and liquidity property. It produces high returns with low transaction costs.

#576 – Boosted Regression Trees in Corporate Bonds

Dienemann, Fabian: A New Perspective on the Corporate Bond Liquidity Factor
https://ssrn.com/abstract=4175668
Abstract:
This study documents properties of market-wide corporate bond liquidity and demonstrates that liquidity risk is an important determinant of returns. During market downturns, transaction costs rise for sellers and fall for buyers. The negative relation between buyer and seller liquidity motivates a new across-measure liquidity factor that incorporates an asymmetric liquidity component. Shocks to market-wide liquidity explain a large fraction of bond return variation in the time series. Primarily driven by the asymmetric component, the liquidity factor attracts a cross-sectional risk premium that is robust to controls for credit, equity, and interest rate factors as well as the illiquidity level.

#138 – Repurchase/New issue Effect
#571 – Post Seasoned Equity Offering Returns in China

Chen, Mengqian and Dutordoir, Marie and Strong, Norman Charles: Cash-Rich Seasoned Equity Issuers
https://ssrn.com/abstract=4209561
Abstract:
We document that a substantial fraction of seasoned equity issuers have large pre-offering excess cash holdings. Cash-rich seasoned equity issuers are not easily reconcilable with the traditional pecking order theory, or with recent empirical findings suggesting that urgent cash requirements drive seasoned equity offerings (SEOs). We examine the role of market timing, agency costs, precautionary motives, repatriation taxes, real options, and negative cash flows in driving cash-rich equity issuers. We find that cash-rich equity issuers are more overvalued, use SEO proceeds more opportunistically, and have worse post-SEO operating and long-term stock price performance than non-cash-rich issuers, consistent with a market timing motive. However, we do not detect differences in SEO announcement returns between cash-rich and non-cash-rich issuers. Our results, which are robust to alternative empirical specifications, imply that investors should place a negative value on firms’ excess cash holdings when assessing an SEO announcement.

And several interesting free blog posts have been published during last 2 weeks:

How to Improve Post-Earnings Announcement Drift with NLP Analysis

Post–earnings-announcement drift (abbr. PEAD) is a well-researched phenomenon that describes the tendency for a stock’s cumulative abnormal returns to drift in the direction of an earnings surprise for some time (several weeks or even several months) following an earnings announcement. There have been many explanations for the existence of this phenomenon. One of the most widely accepted explanations for the effect is that investors under-react to the earnings announcements. Although we already addressed such an effect in some of our previous articles and strategies, we now present a handy method of improving the PEAD by using linguistic analysis of earnings call transcripts.

Are FOMC Announcements Really Informative?

Federal Open Market Committee (FOMC) of Fed (Federal Reserve Board/System) meetings which bring announcements usually followed by press conferences are one of the most important events in the rich calendar of investors’ watch lists. They are always closely watched for possible trading opportunities and are full of volatile moves on both long and short sides in fronts of all asset classes ranging from forex, bonds, and equities to nowadays even crypto markets. In our today’s summary, we will take a closer look at some implications that those kinds of financial phenomena bring.