New strategies:
#398 – Lame-Duck CEOs
Period of rebalancing: monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Simple strategy
Bactest period: 2005 – 2014
Indicative performance: 11.35%
Estimated volatility: 14.71%
Source paper:
Gabarro, Marc and Gryglewicz, Sebastian and Xia, Shuo: Lame-Duck CEOs
https://ssrn.com/abstract=3193048
Abstract:
We examine the relationship between protracted CEO successions and stock returns. In protracted successions, an incumbent CEO announces his or her resignation without a known successor, so the incumbent CEO becomes a “lame duck.” We find that 31% of CEO successions from 2005 to 2014 in the S&P 1500 are protracted, during which the incumbent CEO is a lame duck for an average period of about 6 months. During the reign of lame duck CEOs, firms generate an annual four-factor alpha of 11% and exhibit significant positive earnings surprises. Investors’ under-reaction to no news on new CEO information and underestimation of the positive effects of the tournament among the CEO candidates drive our results.
#399 – When Short Sellers and Corporate Insiders Agree on Stock Pricing
Period of rebalancing: monthly
Markets traded: equties
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1977-2016
Indicative performance: 9.65%
Estimated volatility: 24.10%
Source paper:
Chung, Chune Young and Sul, Hong Kee and Wang, Kainan: When Short Sellers and Corporate Insiders Agree on Stock Pricing
https://ssrn.com/abstract=3191949
Abstract:
The authors propose a strategy that utilizes trading information of both short sellers and corporate insiders. They find that the strategy earns statistically significant and economically meaningful risk-adjusted returns for at least one year, which stems mainly from the information asymmetry between informed and uninformed investors. Based on this finding, they then show that the strategy works best in high information asymmetry environments and during economic expansion periods. The results provide important implications for investment practitioners. Investors interested in high information asymmetry firms can refer to the information on short interest and insider demand when making investment decisions.
New research papers related to existing strategies:
#20 – Volatility Risk Premium Effect
Obregon: Option-Based Equity Strategies
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3134723
Abstract:
Options are derivatives contracts that provide investors the flexibility of constructing expected payoffs for their investment strategies. Option-based equity strategies incorporate the use of options with long positions in equities to achieve objectives such as drawdown protection and higher income. While the range of strategies available is wide, most strategies can be classified as insurance buying (net long options/volatility) or insurance selling (net short options/volatility). The existence of the Volatility Risk Premium, a market anomaly that causes put options to be overpriced relative to what an efficient pricing model expects, has led to an empirical outperformance of insurance selling strategies relative to insurance buying strategies. This paper explores whether, and to what extent, option-based equity strategies should be considered within the long-only equity investing toolkit, given that equity risk is still the main driver of returns for most of these strategies. It is important to note that while option-based strategies seek to design favorable payoffs, all such strategies involve trade-offs between expected payoffs and cost.
#200 – Classical Equity Anomalies Combined with Trendfollowing Filter
Renz: What Goes up Must Not Come Down – Time Series Momentum in Factor Risk Premiums
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3100165
Abstract:
I document significant time variation and predictability in a set of risk factors based on technical indicators. As these indicators are primarily designed to detect trends in asset prices, these findings imply substantial time series momentum in factor risk premiums. Specifically, risk premiums are significantly larger (lower) following recent uptrends (downtrends) in the underlying risk factor. A trend-based dynamic factor strategy, which uses the trend-based signals in order to lever up or down the risk factor, yields annual utility gains of up to 500 basis points, doubles the risk factors' Sharpe ratio, and more than halves their maximum drawdown. In a conditional asset pricing context, employing technical indicators as conditioning information substantially improves a model's explanatory power. Overall, my evidence poses several challenges to risk-based asset pricing theories and seems to be more in line with theories of sentiment and investors initial under- and subsequent overreaction to new information.
And three additional related research papers have been included into existing free strategy reviews during last 2 weeks:
#25 – Small Capitalization Stocks (Size) Premium
#26 – Value (Book-to-Market) Anomaly
Herskovic, Kind, Kung: Size Premium Waves
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3220825
Abstract:
This paper examines the link between microeconomic uncertainty and the size premium across different frequencies in an investment model with heterogeneous firms. We document that the observed time-varying dispersion in firm-specific productivity can account for a large size premium in the 1960's and 1970's, the disappearance in the 1980's and 1990's, and reemergence in the 2000's. Periods with a large (small) size premium coincide with high (low) microeconomic uncertainty. During episodes of high productivity dispersion, small firms increase their exposure to macroeconomic risks. Our model can also explain the strong positive low-frequency co-movement between size and value factors, but a negative relation with the market factor.
#77 – Beta Factor in Stocks
#78 – Beta Factor in Country Equity Indexes
Hedegaard: Time-Varying Leverage Demand and Predictability of Betting-Against-Beta
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3194626
Abstract:
The leverage aversion theory implies that returns to the betting-against-beta (BAB) strategy are predictable by past market returns: An outward shift in investors' aggregate demand function simultaneously increases market prices and increases the expected future BAB return. I confirm the prediction empirically and find that the BAB strategy performs better in times when and in countries where past market returns have been high. I construct timing-strategies that are long BAB half the time and short BAB half the time, based on past market returns, and show that these timing strategies have realized strong historical performance.
And our recommended read to all parties interested in gold …
Bartsch, Baur, Dichtl, Drobetz: Investing in the Gold Market: Market Timing or Buy-and-Hold?
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3202658
Abstract:
While the literature on gold is dominated by studies on its diversification, hedging, and safe haven properties, the question “When to invest in gold?” is generally not analyzed in much detail. We test more than 4,000 seasonal, technical, and fundamental timing strategies for gold. While we find large gains in economic terms relative to the buy-and-hold benchmark for several strategies, the results are robust to data-snooping biases only for selected technical trading strategies. These superior technical trading strategies outperform the buy-and-hold benchmark because they shift out of the gold market following a prolonged trend of negative gold market returns. We verify that the outperformance is not driven by a systematic reaction to the broader market environment and conclude that our results point to the presence of behavioral biases inducing gold market trends.
