New strategies:
#191 – Productivity of Cash Effect in the Stock Market
Period of rebalancing: Yearly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1975 – 2003
Indicative performance: 13.00%
Estimated volatility: 11.14%
Source paper:
Chandrashekar, Rao: The Productivity of Cash and the Cross-Section of Expected Stock Returns
http://www.efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS/2007-Vienna/Papers/0690.pdf
Abstract:
We first show, analytically, that the expected return on the stock, firm size, and the book-to-market ratio (B/M) are functionally dependent on the "productivity of cash," defined as the firm's economic rents scaled by its cash holdings. We then show that, empirically, the productivity of cash is a highly significant and robust negative predictor of stock returns. Our research suggests that the predictive power of size and B/M in earlier studies may stem from their role as proxies for the productivity of cash- a new and economically-rationalized factor that explains the cross-section of stock returns.
#192 – Complexity Effect in Stocks
Period of rebalancing: Monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1977-2009
Indicative performance: 14.98%
Estimated volatility: 14.28%
Source paper:
Lou, Cohen: Complicated Firms
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1570869
Abstract:
We exploit a novel setting in which the same piece of information affects two sets of firms: one set of firms requires straightforward processing to update prices, while the other set requires more complicated analyses to incorporate the same piece of information into prices. We document substantial return predictability from the set of easy-to-analyze firms to their more complicated peers. Specifically, a simple portfolio strategy that takes advantage of this straightforward vs. complicated information processing classification yields returns of 117 basis points per month. Consistent with processing complexity driving the return relation, we further document that the more complicated the firm, the more pronounced the return predictability. In addition, we find that sell-side analysts are subject to these same information processing constraints, as their forecast revisions of easy-to-analyze firms predict their future revisions of more complicated firms.
New research paper related to existing strategies:
#97 – Half-day Reversal
Ramiah, Mugwagwa, Naughton: Hot and Cold Strategies: Australian Evidence
http://www.efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS/2008-athens/366.pdf
Abstract:
This study explores a high-frequency tactical asset allocation strategy. In particular, we investigate the profitability of momentum trading strategies and contrarian investment strategies for equities listed on the Australian Stock Exchange (ASX). This paper takes into consideration the short-selling restrictions imposed by the ASX on the stocks used in these two strategies. We look at the relationship between stock returns and past trading volume for these equities within our sample portfolios. This research also investigates the seasonal aspects of contrarian portfolios and observes an April effect. We report significant contrarian profits for the period investigated and show that contrarian profit is a persistent feature for the strategies examined. We also document that contrarian portfolios earn returns as high as 6.54% per day for portfolios with no short-selling restrictions, and 4.71% on the restricted model. The results also support the view that volume traded affects stock returns and shows that market imperfections such as short-selling restrictions affect investors’ return.
