New strategies:
#291 – Options Convexity Predicts Consecutive Stock Returns
Period of rebalancing: monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 2000-2013
Indicative performance: 14.44%
Estimated volatility: 9.99%
Source paper:
Park, Kim, Shim: A Smiling Bear in the Equity Options Market and the Cross-section of Stock Returns
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2632763
Abstract:
We propose a measure for the convexity of an option-implied volatility curve, IV convexity, as a forward-looking measure of excess tail-risk contribution to the perceived variance of underlying equity returns. Using equity options data for individual U.S.-listed stocks during 2000-2013, we find that the average return differential between the lowest and highest IV convexity quintile portfolios exceeds 1% per month, which is both economically and statistically significant on a risk-adjusted basis. Our empirical findings indicate that informed options traders anticipating heavier tail risk proactively induce leptokurtic implied distributions of underlying stock returns before equity investors express their tail-risk aversion.
#292 – Momentum Seasonality and Investor Preferences
Period of rebalancing: quarterly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Simple strategy
Bactest period: 1983-2012
Indicative performance: 8.00%
Estimated volatility: not stated
Source paper:
Barradale: Covering-up when tide goes out? Momentum sesionality and investor preferences
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2603199
Abstract:
We use the seasonal patterns in momentum returns to provide insight into investor preferences. We find the momentum factor return is much greater prior to the calendar quarter-end, especially after a stock market decline. This pattern holds more strongly for larger stocks, for both winners and losers, for the US and internationally, and especially in recent years. The established year-end seasonality is consistent with the quarterly pattern, rather than tax-loss selling. The time-series momentum of markets follows the same pattern, primarily after a market decline. The patterns imply investors prefer well-performing stocks/markets at the quarter-end, particularly in a declining market.
New research paper related to existing strategies:
#117 – Lottery Effect in Stocks
#223 – Realized Skewness Predicts Equity Returns
#266 – Skewness Effect in Country Equity Indexes
#268 – Expected Skewness and Momentum in Stocks
Zhang: Downside Gambling and Asset Prices
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2648144
Abstract:
This paper documents a novel empirical finding: skewness preference has a greater impact on asset prices during market downturns than during market booms. This finding is named as "downside gambling effect". Exploiting the significant negative relationship between downside skewness and future asset returns alone will generate an annual excess return of 7.74% that is not explained by Fama-French factors. This empirical result is robust to various controls, such as for different portfolio holding periods, for value-weighted portfolios, or for volatility and kurtosis effects. A model is proposed to explain this fact by showing that in bad times, fewer people gamble and the remaining gambling investors invest more heavily in lottery-type stocks. The model also implies that in bad times, risk aversion is higher and more people fear disaster.
Two additional related research paper have been included into existing free strategy reviews during last 2 week:
#13 – Short Term Reversal in Stocks
#14 – Momentum Effect in Stocks
#15 – Momentum Effect in Country Equity Indexes
Dobrynskaya: Upside and Downside Risks in Momentum Returns
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2695001
Abstract:
I provide a novel risk-based explanation for the profitability of momentum strategies. I show that the past winners and the past losers are differently exposed to the upside and downside market risks. Winners systematically have higher relative downside market betas and lower relative upside market betas than losers. As a result, the winner-minus-loser momentum portfolios are exposed to extra downside market risk, but hedge against the upside market risk. Such asymmetry in the upside and downside risks is a mechanical consequence of rebalancing momentum portfolios. But it is unattractive for an investor because both positive relative downside betas and negative relative upside betas carry positive risk premiums according to the Downside-Risk CAPM. Hence, the high returns to momentum strategies are a mere compensation for their upside and downside risks. The Downside Risk-CAPM is a robust unifying explanation of returns to momentum portfolios, constructed for different geographical and asset markets, and it outperforms alternative multi-factor models.
#25 – Small Capitalization Stocks Premium Anomaly
#26 – Value (Book-to-Market) Anomaly
Lambert, Hubner: Size Matters, Book Value Does Not! The Fama-French Empirical CAPM Revisited
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2506690
Abstract:
The Fama and French (F&F) factors do not reliably estimate the size and book-to-market effects. Our paper shows that the former has been underestimated in the US market while the latter overestimated. We do so by replacing F&F's independent rankings by the conditional ones introduced by Lambert and Hubner (2013), over which we improve the sorting procedure. This new specification better reflects the properties of the individual risk premiums. We emphasize a much stronger size effect than conventionally documented. As a major related outcome, the alternative risk factors deliver less specification errors when used to price passive investment indices..
