New strategies:
#316 – Combined Momentum and Counter Trend Strategy on US Equity Indexes
Period of rebalancing: daily
Markets traded: equities
Instruments used for trading: ETFs, futures, CFDs
Complexity: Simple strategy
Bactest period: 1971-2008
Indicative performance: 12.20%
Estimated volatility: not stated
Source paper:
Leake: Opposites Attract: Improvements to Trend Following for Absolute Returns
http://www.anchor-capital.com/Resources/OppositesAttract.pdf
Abstract:
Recent market events have reminded market participants of the long-term profitability of long/short trend following strategies. While trend following can be profitable over the long term, choppy or trendless markets can make trend following challenging. Large short-term, countertrend moves are typical during strongly trending markets, and when unaccounted for can often produce a large drawdown in an otherwise successful trend following system.
The purpose of this paper is to demonstrate a simple quantitative blend of Momentum investing and Counter Trend methodology that offers the benefits of long/short trend following strategies with reduced drawdown. The result is a simple to-apply investment method that has delivered a significant increase in annual returns and reduced risk over the benchmark index over a 35-year period.
#317 – Trading FOMC Announcements with Summary of Economic Projections
Period of rebalancing: intraday
Markets traded: equities
Instruments used for trading: ETFs, futures, CFDs
Complexity: Simple strategy
Bactest period: 2012-2015
Indicative performance: 10.50%
Estimated volatility: 5.00%
Source paper:
Kurov, Gu: Relief Rallies after FOMC Announcements: How Much Do Investors Care About Uncertainty?
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2810262
Abstract:
We find substantial positive average stock returns after FOMC announcements accompanied by the release of the Summary of Economic Projections (SEP) and press conference by the Fed Chair. A simple trading strategy of buying index futures contracts five minutes before the announcement and closing the position 55 minutes after the release would have generated an annualized Sharpe ratio of 2.10. We show that the market uncertainty, measured by the VIX index, declines significantly after FOMC meetings followed by SEP releases. After controlling for changes in the VIX, the positive post-announcement returns disappear, suggesting that these returns are related to the resolution of uncertainty after the announcement.
New research paper related to existing strategy:
#171 – Market Timing Filter Applied to a Classical Stock Anomalies
Hoffstein, Sibears: Market Timing Factor Premiums – Exploiting Behavioral Biases for Fun and Profit
http://www.thinknewfound.com/wp-content/uploads/2016/04/Market-Timing-Factor-Premiums.pdf
Abstract:
In recent years, factor investing has come into vogue as a better mousetrap than traditional stock picking. Proponents of factor investing argue that instead of focusing on picking individual securities, investing in an index weighted towards a certain characteristic can more consistently harvest alpha. Numerous studies on empirical asset pricing have shown that portfolios formed on selected stock characteristics can deliver superior risk-adjusted returns. These characteristics include value, size, momentum, quality, low-volatility and high yield. In their five-factor model, Eugene Fama and Kenneth French identify four non-market factors: value, size, investment, and profitability. While these factor tilts have historically exhibited significant outperformance, the realized premium considerable short-term variability. We posit that the mechanics for why they vary is behavioral. If this is indeed the case, then there is an argument that the factor premiums themselves could be timed to generate further excess return by building a momentum portfolio to ride the wave of short-term performance chasing and a value portfolio to capture the eventual long-term valuation reversion.
#308 – Short-Term Momentum in Currencies
Grobys, Haga: Are Momentum Crashes Pervasive Regardless of Strategy? Evidence from the Foreign Exchange Market
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2802627
Abstract:
This paper studies the option-like behavior of popular momentum strategies implemented in foreign exchange markets. The results confirm those of Daniel and Moskowitz (2013) in finding strong option-like behavior for both momentum measures, based on the cumulative return from 12 and 6 months prior to the formation date to one month prior to the formation date. Surprisingly, there is no such evidence for the popular momentum strategy accounting for a one-month formation period.
Two additional related research papers have been included into existing free strategy reviews during last 2 week:
#12 – Pairs Trading with Stocks
Mazo, Lafuente, Gimeno: Pairs Trading Strategy and Idiosyncratic Risk. Evidence in Spain and Europe.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2807956
Abstract:
Pairs trading strategy’s return depends on the divergence/convergence movements of a selected pair of stocks’ prices. However, if the stable long term relationship of the stocks changes, price will not converge and the trade opened after divergence will close with losses. We propose a new model that, including companies’ fundamental variables that measure idiosyncratic factors, anticipates the changes in this relationship and rejects those trades triggered by a divergence produced by fundamental changes in one of the companies. The model is tested on European stocks and the results obtained outperform those of the base distance model.
The most of the risk premiums are better explained by tail-risk skewness (compared to volatility)… Related to multiple strategies.
Lemperiere, Deremble, Nguyen, Seager, Potters, Bouchaud: Risk Premia: Asymmetric Tail Risks and Excess Returns
http://arxiv.org/pdf/1409.7720v3.pdf
Abstract:
We present extensive evidence that “risk premium'' is strongly correlated with tail-risk skewness but very little with volatility. We introduce a new, intuitive definition of skewness and elicit an approximately linear relation between the Sharpe ratio of various risk premium strategies (Equity, Fama-French, FX Carry, Short Vol, Bonds, Credit) and their negative skewness. We find a clear exception to this rule: trend following has both positive skewness and positive excess returns. This is also true, albeit less markedly, of the Fama-French “Value'' factor and of the “Low Volatility'' strategy. This suggests that some strategies are not risk premia but genuine market anomalies. Based on our results, we propose an objective criterion to assess the quality of a risk-premium portfolio.
