New strategies:
#245 – Post-Split Drift
Period of rebalancing: daily
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1984 – 2011
Indicative performance: 21.04%
Estimated volatility: 22.24%
Source paper:
Chan, Li, Lin: Post-Split Drift and Post-Earnings Announcement Drift: One Anomaly or Two?
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2329740
Abstract:
We find that the phenomenon of post-split return drift continues to hold during the 1984-2011 period. However, when we examine the post-split horizon month by month, the results indicate that this drift mainly concentrates on the first three months following split announcements. Given the short duration of the drift, we explore whether the post-split drift is driven by the post-earnings announcement return anomaly. We find that although splits and earnings surprises are correlated, they generate distinct return drifts. We show that a trading strategy exploiting both corporate events generates a 4.9% abnormal return over the three-month horizon. In addition, the return drift that we report survives the new approach proposed by Bessembinder and Zhang (2013) on abnormal buy-and-hold returns.
New research paper related to existing strategies:
#12 – Pairs Trading with Stocks
Bowen, Hutchinson: Pairs Trading in the UK Equity Market: Risk and Return
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2350113
Abstract:
In this paper we provide the first comprehensive UK evidence on the profitability of the pairs trading strategy. Evidence suggests that the strategy performs well in crisis periods, so we control for both risk and liquidity to assess performance. To evaluate the effect of market frictions on the strategy we use several estimates of transaction costs. We also present evidence on the performance of the strategy in different economic and market states. Our results show that pairs trading portfolios typically have little exposure to known equity risk factors such as market, size, value, momentum and reversal. However, a model controlling for risk and liquidity explains a far larger proportion of returns. Incorporating different assumptions about bid ask spreads leads to reductions in performance estimates. When we allow for time-varying risk exposures, conditioned on the contemporaneous equity market return, risk adjusted returns are generally not significantly different from zero.
