New strategies:
#421 – Earnings Response Elasticity
Period of rebalancing: Daily
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1985-2008
Indicative performance: 8.50%
Estimated volatility: 17.15%
Source paper:
Yan, Zhipeng and Zhao, Yan and Wei, Xu and Cheng, Lee-Young: Earnings Response Elasticity and Post-Earnings-Announcement Drift
https://ssrn.com/abstract=3309788
Abstract:
This article studies the relationship between initial market response to earnings surprise and subsequent stock price movement. We first develop a new measure – the earnings response elasticity (ERE) – to capture initial market response. It is defined as the absolute value of earnings announcement abnormal returns (EAARs) divided by the earnings surprise. The ERE is then examined under various categories contingent on the signs of earnings surprises (+/-/0) and EAARs (+/-). We find that a weaker initial market reaction to earnings surprises, or lower ERE, leads to a larger post-announcement drift. A trading strategy of taking a long position in stocks in the lowest ERE quintile when both earnings surprises and EAARs are positive and a short position when both are negative can generate an average abnormal return of 5.11 percent per quarter.
#422 – The Value Uncertainty Premium
Period of rebalancing: Monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1986-2016
Indicative performance: 12.01%
Estimated volatility: 14.62%
Source paper:
Bali, Turan G. and Del Viva, Luca and El Hefnawy, Menna and Trigeorgis, Lenos: The Value Uncertainty Premium
https://ssrn.com/abstract=3299582
Abstract:
This paper investigates whether the time-series volatility of book-to-market (BM), called value uncertainty (UNC), is priced in the cross-section of equity returns. A size-adjusted value-weighted factor with a long (short) position in high-UNC (low-UNC) stocks generates an annualized alpha of 6-8%. This value uncertainty premium is driven by outperformance of high-UNC firms, and is not explained by established risk factors or firm characteristics, such as price and earnings momentum, investment, profitability, or BM itself. UNC is correlated with macroeconomic fundamentals and predicts future market returns and market volatility. Results provide a rational asset-pricing explanation of the UNC premium.
New research papers related to existing strategies:
#91 – Momentum Factor and Style Rotation Effect
Liu, Wang: Do Style Momentum Strategies Produce Abnormal Returns: Evidence from Index Investing
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3241701
Abstract:
In this study, we investigate the return enhancement ability of style momentum strategy: a strategy that switches between value and growth styles based on previous performance. We explore the variation in abnormal returns of long-only and long-short momentum strategies using various style based indexes (Russell value/growth indexes, Fama-French value/growth indexes, and MSCI value/growth indexes) where value and growth stocks are classified using different criteria. Our results show that the performance of style momentum does vary across different index families. We first find that in general the long-only strategies create significant positive abnormal returns whereas the long-short strategies do not. Second, for a fixed formation period, abnormal returns of the strategies tend to decrease when the length of holding periods increase. Third, abnormal returns are stronger and more significant when rotating within large cap value and growth indexes while abnormal returns are weaker and inconsistent when rotating within small cap value and growth indexes. Fourth, strategies based on rotating across all market cap levels do not generate consistently significant positive abnormal returns for Russell indexes or Fama-French indexes but they do for MSCI indexes. Fifth, individual stock momentum only explains a very small portion of the returns of style moment strategies
#295 – Seasonality Effect in Anomalies
Zaremba: Seasonality in the Cross Section of Factor Premia
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3332908
Abstract:
This study examines the seasonality effect in the cross section of factor premia representing a broad set of stock market strategies. Using cross-sectional and time-series tests, we investigated the cross-sectional seasonality of market, value, size, momentum, quality, and low-risk premia within a sample of 24 international equity markets for the years 1986–2016. We provide convincing evidence that the factors with the highest (lowest) mean returns in the same calendar months in the past continue to overperform (underperform) in seven of the studied countries: Denmark, Finland, France, Israel, Spain, Sweden, and the United States. Furthermore, when the factors in multiple countries are considered, the past same-month returns display strong predictive power for future size and low-risk premia.
#368 – Betting Against Alpha
Horenstein: The Unintended Impact of Academic Research on Asset Returns: The CAPM Alpha
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3054718
Abstract:
This paper explores a channel whereby asset-pricing anomalies can appear as investors alter portfolios according to findings in academic research. In particular, I find that assets with low realized CAPM alphas outperform those with high ones, but only after the CAPM’s publication in the 1960s. In a multifactor world the CAPM is misspecified. Then, its widespread application and the multifactor literature that followed generated incentives for fund managers to tilt portfolios systematically away from low CAPM alpha assets, causing such assets to be undervalued. My results also provide an alternative explanation for existing anomalies based on past return patterns.
And two additional related research papers have been included into existing free strategy reviews during last 2 weeks:
#25 – Size Factor
#26 – Value (Book-to-Market) Factor
Hung, Song, Xiang: Fragile Factor Premia
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3312837
Abstract:
We demonstrate that returns and volatilities of the Fama-French size and value factors are significantly determined by non-fundamental flow-induced trading from actively managed equity mutual funds. Mutual fund flows are largely ignorant about systematic risks. These non-fundamental shifts in demand induce large return heterogeneity within and across the Fama-French size and book-to-market portfolios. We show that aggregate mutual fund flow- induced trades across the size and book-to-market spectrum significantly influence the size and value premia, followed by large subsequent reversals. We also find that the expected volatilities of mutual funds’ flow-induced trades strongly predict future factor volatilities. Our results highlight the importance of non-fundamental demand shocks in determining factor premia and factor volatilities.
Related to all major factor strategies (trend, momentum, value, carry, seasonality and low beta/volatility):
Baltussen, Swinkels, van Vliet: Global Factor Premiums
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3325720
Abstract:
We examine 24 global factor premiums across the main asset classes via replication and new-sample evidence spanning more than 200 years of data. Replication yields ambiguous evidence within a unified testing framework with methods that account for p-hacking. The new-sample evidence reveals that the large majority of global factors are strongly present under conservative p-hacking perspectives, with limited out-of-sample decay of the premiums. Further, utilizing our deep sample, we find global factor premiums to be not driven by market, downside, or macroeconomic risks. These results reveal strong global factor premiums that present a challenge to asset pricing theories.
And an interesting financial academic paper which analyzes an alternative approach to rebalancing of static asset allocation strategies:
Granger, Harvey, Rattray, Van Hemert: Strategic Rebalancing
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3330134
Abstract:This paper explores a channel whereby asset-pricing anomalies can appear as investors alter portfolios according to findings in academic research. In particular, I find that assets with low realized CAPM alphas outperform those with high ones, but only after the CAPM’s publication in the 1960s. In a multifactor world the CAPM is misspecified. Then, its widespread application and the multifactor literature that followed generated incentives for fund managers to tilt portfolios systematically away from low CAPM alpha assets, causing such assets to be undervalued. My results also provide an alternative explanation for existing anomalies based on past return patterns.
