New strategies:
#391 – The Conservative Formula
Period of rebalancing: quarterly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Simple strategy
Bactest period: 1929-2016
Indicative performance: 15.10%
Estimated volatility: 16.50%
Source paper:
van Vliet, Pim and Blitz, David: The Conservative Formula: Quantitative Investing Made Easy
https://ssrn.com/abstract=3145152
Abstract:
We propose a conservative investment formula which selects 100 stocks based on three criteria: low return volatility, high net payout yield, and strong price momentum. We show that this simple formula gives investors full and efficient exposure to the most important factor premiums, and thus effectively summarizes half a century of empirical asset pricing research into one easy to implement investment strategy. With a compounded annual return of 15.1 percent since 1929, the conservative formula outperforms the market by a wide margin. It reduces downside risk and shows a positive return over every decade. The formula is also strong in European, Japanese and Emerging stock markets, and beats a wide range of other strategies based on size, value, quality, and momentum combinations. The formula is designed to be a practically useful tool for a broad range of investors and addresses academic concerns about ‘p-hacking’ by using three simple criteria, which do not even require accounting data.
#392 – Intraday Market-Wide Ups/Downs and Returns
Period of rebalancing: intraday
Markets traded: equities
Instruments used for trading: futures, CFDs, ETFs
Complexity: Very complex strategy
Bactest period: 2012 – 2015
Indicative performance: 23.75%
Estimated volatility: 31.56%
Source paper:
Zhang, Wei and Lin, Shen and Zhang, Yongjie: Intraday Market-Wide Ups/Downs and Returns
https://ssrn.com/abstract=3131369
Abstract:
Using stock market data over 16 years for Chinese stock markets and over 3 years for U.S. stock markets, this study explores the explanatory power of early intraday market-wide up and down movements to the subsequent intraday returns within the same trading day. As compared to the closing of the previous trading day, we introduce two intraday market-wide up/down indicators in terms of the index return and the proportional difference in the numbers of stocks moving upwards to downwards at each minute. A time series analysis shows an economically and statistically significant positive relation between the intraday indicators and the subsequent intraday returns of the market indices. Intraday trading strategies that exploit this intraday relationship lead to monthly returns of 4.1% in the Chinese market and 2.8% in the U.S. market. In addition, the strategies are more profitable in markets with high activity of individual investors (i.e., high trading value, low trading volume per transaction, small-cap, high B/M ratio, low institutional ownership, low price, and high number of shareholders). The results indicate that simple intraday market-wide up/down movements in the earlier trading affect the sentiment of retail investors, resulting in market movements in the same direction within the trading day.
New research papers related to existing strategies:
#73 – Pairs Trading with Commodities
Psaradellis, Laws, Pantelous, Sermpinis: Pairs Trading, Technical Analysis and Data Snooping: Mean Reversion vs Momentum
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3128788
Abstract:
Using a large and sophisticated universe of 18,410 technical trading rules (TTRs), and adopting the false discovery rate method to control for data snooping bias, we examine the performance of statistical arbitrage investment strategies using daily data from 1990 to 2016 for 15 commodity, equity and currency pairs frequently traded by statistical arbitrage investors. We find evidence of significant predictability, especially for commodity spreads. In addition, our subperiod analysis rejects the existence of uniformly monotonic downward trend in the selection of outperforming TTRs over the years. Use of excessive out-of-sample analysis to cross-validate the results obtained in different subperiods finds that potential short-term opportunities for pairs trading returns have been increased in certain cases, suggesting interim market inefficiencies over the sample.
#175 – Pairs Trading on Intraday Basis
Miao: High Frequency and Dynamic Pairs Trading Based on Statistical Arbitrage Using a Two-Stage Correlation and Cointegration Approach
http://www.stagirit.org/sites/default/files/articles/a_0304_33007-117256-1-pb.pdf
Abstract:
In this paper, a high frequency and dynamic pairs trading system is proposed, based on a market-neutral statistical arbitrage strategy using a two-stage correlation and cointegration approach. The proposed pairs trading system was applied to equity trading in U.S. equity markets in any type of market cycle condition to capture statistical mispricing between the prices of each stock pair based on its residuals and to model the stock pairs naturally as a mean-reversion process. The proposed pairs trading system was tested for out-of-sample testing periods with high frequency stock data from 2012 and 2013. Our trading strategy yields cumulative returns up to 56.58% for portfolios of stock pairs, well exceeding the S&P 500 index performance by 34.35% over a 12-month trading period. The proposed trading strategy achieved a monthly 2.67 Sharpe ratio and an annual 9.25 Sharpe ratio. Furthermore, the proposed pairs trading system performed well during the two months in which the S&P 500 index had negative returns. Thus, the trading system might be especially more profitable at times when the U.S. stock market performed poorly. Therefore, the performance returns of the proposed pairs trading system were relatively market-neutral and were positive regardless of the performance of the S&P 500 index.
Three additional related research papers have been included into existing free strategy reviews during last 2 weeks:
#5 – FX Carry Trade
#8 – FX Momentum
#9 – FX Value – PPP Strategy
Lohre, Kolrep: Currency Management with Style
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3175387
Abstract:
Currency hedging is often approached with an all-or-nothing mentality: either full hedging of all foreign exchange (FX) positions or no hedging at all. As a more nuanced alternative, we suggest systematically harvesting the benefits of the FX style factors carry, value and momentum. In particular, we demonstrate how these factors can expand the opportunity set of traditional asset allocation when pursuing either FX factor-based tail-hedging or return-seeking strategies.
#13 – Short Term Reversal in Stocks
Miwa: Short-Term Return Reversals and Intraday Transactions
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3174484
Abstract:
I examine whether a short-term reversal is attributed to past intraday or overnight price movements. The results show that intraday returns significantly reverse in the following week, while overnight returns do not, indicating that the short-term reversal is attributed to past intraday price movements. In addition, the reversal of intraday returns is stronger for more illiquid stocks and during more volatile market conditions, while the reversal is unaffected by fundamental news. This result supports the view that short-term reversals are attributable mainly to price concessions for liquidity providers to absorb intraday uninformed transactions, rather than intraday price reactions to fundamental information.
And related to all trendfollowing strategies:
Sepp: Trend-Following Strategies for Tail-Risk Hedging and Alpha Generation
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3167787
Abstract:
Because of the adaptive nature of position sizing, trend-following strategies can generate the positive skewness of their returns, when infrequent large gains compensate overall for frequent small losses. Further, trend-followers can produce the positive convexity of their returns with respect to stock market indices, when large gains are realized during either very bearish or very bullish markets. The positive convexity along with the overall positive performance make trend-following strategies viable diversifiers and alpha generators for both long-only portfolios and alternatives investments. I provide a practical analysis of how the skewness and convexity profiles of trend-followers depend on the trend smoothing parameter differentiating between slow-paced and fast-paced trend-followers. I show how the returns measurement frequency affects the realized convexity of the trend-followers. Finally, I discuss an interesting connection between trend-following and stock momentum strategies and illustrate the benefits of allocation to trend-followers within alternatives portfolio.
