New strategy:
#304 – Seasonality in Treasury Auctions
Period of rebalancing: daily
Markets traded: bonds
Instruments used for trading: futures, CFDs, swaps, bonds
Complexity: Simple strategy
Bactest period: 1998-2008
Indicative performance: 5.74%
Estimated volatility: 6.83%
Source paper:
Lou, Yan and Zhang: Anticipated and Repeated Shocks in Liquid Markets
http://personal.lse.ac.uk/loud/Shocks.pdf
Abstract:
This paper examines how anticipated and frequently repeated shocks are absorbed in liquid financial markets. We show that Treasury security prices in the secondary market decrease significantly in the few days leading up to Treasury auctions and recover shortly thereafter, even though the time and amount of each auction are announced in advance. The issuance cost to the Treasury Department is estimated to be between 9 and 18 basis points of the auction size, or over half a billion dollars for note issuance alone in 2007, most of which can be attributed to the price pressure effect around auction days. These results are linked to dealers’ limited risk-bearing capacity and the imperfect capital mobility of end-investors, highlighting the important role of market frictions even in very liquid financial markets.
New research papers related to existing strategies:
#20 – Volatility Risk Premium Effect
Bondarenko: An Analysis of Index Option Writing with Monthly and Weekly Rollover
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2750188
Abstract:
This paper analyzes the performance of the two CBOE PutWrite Indexes through the end of 2015. The two PutWrite indexes are found to have had strong performance in several areas: 1) Annual premium income: From 2006 to 2015, the average annual gross premium collected was 24.1 percent for the PUT Index and 39.3 percent for the WPUT Index. While a one-time premium collected by the weekly WPUT Index usually was smaller than a one-time premium collected by the monthly PUT Index, the WPUT Index had higher aggregate annual premiums because premiums were collected 52 times, rather than 12 times, per year. 2) Lower risk: Over the last 10 years, since the launch of Weeklys options, the WPUT Index had a lower standard deviation than the PUT and S&P 500 Indexes. The maximum drawdowns were 24.2 percent for the WPUT Index, 32.7 percent for the PUT Index and 50.9 percent for the S&P 500 Index. 3) Higher long-term returns with lower volatility: Looking longer-term with the PUT Index, since mid-1986, the annual compound return of the PUT Index was 10.13 percent, compared with 9.85 percent for the S&P 500 Index. The standard deviation of the PUT Index was substantially lower as well, 10.16 percent versus the S&P 500 Index’s 15.26 percent.
#20 – Volatility Risk Premium Effect
Dapena, Siri: Index Options Realized Returns Distributions from Passive Investment Strategies
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2733774
Abstract:
Few papers provide research about options returns, and the few available are focused in the analysis from the perspective of the long side of the option contract, i.e. the buyer that pays the price and her expected and realized option return. The main point of our research work is to provide a simple metric to analyze option returns from the perspective of the short side of the contract, the seller, where at the time of the sale of naked options, capital is committed in the form of a guarantee or margin (similar to net worth). We estimate realized returns from passive investment strategies, by assuming puts and calls are kept until the expiration of the maturity. To that purpose we develop an appropriate algorithm which is applied on real historic data. Our result is a distribution of realized option returns (ex-ante prices and ex-post cash flows whether the options end up in or out-of-the-money with respect to margin requirements) for the seller point of view, as if the seller was an insurer seeking to calculate how profitable the insurance activity is. From the results we can see that selling puts is more profitable than selling calls, without adjusting for the return of the underlying asset and for the risk free rate of return, something in line with what was expected, but we also find that the risk is approximately the same. We also find that time tends to increase the realized returns, measured everything on annual basis.
#54 – Momentum and State of Market (Sentiment) Filters
Heidari: Momentum Crash Management
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2578296
Abstract:
Momentum is one of the largest and most pervasive market anomalies. However, despite a high mean and Sharpe ratio, momentum suffers from large negative skewness that comes from momentum crash periods. These crashes occur in times of both market stress and market rebound and thus variables that capture these episodes, can be used as momentum predictors. Once momentum prediction has been proved, the predictors can be applied to momentum risk management. I introduce two new momentum predictors and show their predictability in single and multiple regression models in the presence of other predictors that have been used before. I then introduce a new method of momentum risk management that has a lower transaction cost than existing methods, both in terms of turnover and price impact.
#207 – Value Effect within Countries
Keimling: Predicting Stock Market Returns Using the Shiller CAPE — An Improvement Towards Traditional Value Indicators?
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2736423
Abstract:
Existing research indicates that it is possible to forecast potential long-term returns in the S&P 500 for periods of more than 10 years using the cyclically adjusted price-to-earnings ratio (CAPE). This paper concludes that this relationship has also existed internationally in 17 MSCI Country indexes since 1979. In addition, the paper also examines the forecasting ability of price-to-earnings, price-to-cash-flow and price-to-book ratio, as well as that of dividend yield and of CAPE adjusted for changes in payout ratios. The results indicate that only price-to-book ratio and CAPE enable reliable forecasts on subsequent returns and market risks. In countries with structural breaks, price-to-book ratio even exhibits some advantages compared to CAPE. Based on these findings, the long-term equity market potential for various markets is forecasted using CAPE and price-to-book ratio. The current valuation makes it likely that investors with a global portfolio can achieve real returns of 6% over the next 10 to 15 years. Even greater increases can be expected in European equity markets (8%) and in emerging markets (9%). Due to the high valuation of the US stock market, US investors can only expect below-average returns of 4% with a higher drawdown potential.
#224 – Profitability Factor Combined with Value Factor
Lam, Prombutr: Further Tests on the Investment and Profitability Effects: Q-Theory or Mispricing?
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2746793
Abstract:
We perform 512 improved tests to evaluate the q-theory with investment frictions versus the mispricing explanation with limits to arbitrage for explaining the investment effect (432 tests) and the profitability effect (80 tests). Our improvements concurrently address the following. (1) The q-theory requires both effects to be examined simultaneously while the mispricing explanation does not. (2) An index of investment frictions and an index of limits to arbitrage are used to involve equal number of interactive tests on each story for fair comparison. (3) A comprehensive list of investment or profitability measures is used instead of a single measure. (4). A restriction hinging on the contour of the investment-return relation across low versus high investment regions is used to increase the number of tests. (5) Interactions within the full sample in additional to comparisons across partitioned subsamples are used to provide larger sample size. For the profitability effect, 82% (25%) of the results support the q-theory (mispricing explanation). For the investment effect, 61% (69%) of the overall results support the q-theory (mispricing explanation) while 73 % (63%) of the results from more restrictive tests support the q-theory (mispricing explanation).
Two additional related research papers have been included into existing free strategy reviews during last 2 week:
#21 – Momentum Effect in Commodities
#22 – Term Structure Effect in Commodities
#118 – Time Series Momentum Effect
Blocher, Cooper, Molyboga: Performance (and) Persistence in Commodity Funds
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2658153
Abstract:
This study documents persistent, net-of-fees, alpha-generating commodity trading advisor funds focused on commodity investment (“Commodity Funds”). The baseline for performance measurement is a new benchmark model that includes factors established in the literature. A nonparametric bootstrap test establishes the existence of alpha that cannot be explained by luck. Performance persists 12 months out of sample and subsequently disappears. Such performance, without a reversal, indicates that persistent alpha is based in information about fundamentals, not fund flows or sentiment. These results are robust to data biases established in the literature.
#52 – Asset Growth Effect
Prombutr, Phengpis, Lam: Anatomy of the Mispricing Theory: Evidence from Growth Anomalies
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2746998
Abstract:
This paper investigates corporate growth anomalies in asset pricing from behavioral perspectives. Cross-sectional analyses indicate that a long-term 3-year investment growth is statistically significant in explaining subsequent stock returns, but the first 1-year growth that is closest to the formation is priced by investors the most, followed by the second and third ones, monotonically. We find that the evidence is driven by myopic mispricing in that investors tend to put more weights on recent information since the evolution of the firm’s prospects around the formation year consistently shows that the growth closest (farthest) to the formation has the most (least) severe mispricing. Further investigations show that the mispricing evolution is directly amplified by limits to arbitrage and that benchmark-adjusted returns on short positions are affected more than those on long positions. However, the farther growth is less sensitive to the limit-to-arbitrage because of the extrapolation is myopic. The asset growth anomaly also shows the same pattern as the investment growth anomaly.
