New strategy:
#350 – Effect of Corruption on FX Markets
Period of rebalancing: yearly
Markets traded: currencies
Instruments used for trading: futures, forwards, swaps, CFDs
Complexity: Simple strategy
Bactest period: 2001 – 2016
Indicative performance: 6.04%
Estimated volatility: 8.14%
Source paper:
Grobys, Heinonen: Corruption, carry trades, and the cross section of currency returns
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2961743
Abstract:
This is the first paper that explores the effects of corruption on the FX market. It finds that currencies of countries with high corruption perceptions generate statistically significantly lower returns than currencies of countries with low corruption perceptions. Moreover, the portfolio spread is highly correlated with NBER recessions and U.S. consumption growth of nondurable goods. Interestingly, stochastic discount factor model analysis reveals that the portfolio spread is useful for pricing the cross section of currency returns, even when controlling for standard FX risk factors.
New research papers related to existing strategies:
#49 – S&P 500 Index Addition Effect
Kappou: The Diminished Effect of Index Rebalances
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2971211
Abstract:
The author revisits the strategy of trading S&P 500 index re-compositions under the pre- and post-crisis financial environments, proving that the return structure has significantly changed. The results show for the first time, that there are currently no tradable abnormal returns between announcement and event dates in the post-crisis sample period, indicating smoother rebalancing mechanisms by bank’s client facing desks and better services for passive end-investors. The newly added firms inflate the S&P 500 index by less than 10 basis points per year. The results could be attributed to improved execution algorithms used by the banks, and potentially to the new regulatory reforms in the sector, which prevents financial institutions from taking large trading positions with their balance sheets.
#151 – EBIDTA/TEV Measure Effect
#224 – Profitability Factor Combined with Value Factor
Cakici, Chatterjee, Tang: Alternative Profitability Measures and Cross Section of Expected Stock Returns: International Evidence
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2969687
Abstract:
This paper provides an extensive international analysis of the cross-sectional return predictive power of a variety of firm-level profitability measures, calculated from different combinations of three important measures of earnings (gross profit, operating income, and EBIT) and four scaling variables (enterprise value, book value of assets, market value of equity, and book value of equity). The sample covers stock-returns data over the period 1991-2016 from four regions in the world: North America, Europe, Japan and Asia Pacific. Regarding the scaling measure, we find that irrespective of the choice of a profit measure, the cross-sectional predictive relation of firm profitability and stock returns is more pronounced when profits are scaled by enterprise value or market value of equity. Regarding the profit measure, we find that the predictive power is more pronounced when profit is measured by gross profit. Our findings are consistent with the hypotheses that the predictive power of “profits-to-market price” factor is partly attributable to stock overvaluation arising from systematic behavioral biases and partly to the choice of a “clean” measure of earnings.
#234 – Carry Factor within Asset Classes
Baltas: Optimising Cross-Asset Carry
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2968677
Abstract:
The term "carry" has been primarily studied and explored within currency markets where, contrary to the uncovered interest rate parity, borrowing from a low interest rate country and investing in a high interest rate country has historically delivered positive and statistically significant returns. This paper extends the notion of carry to different asset classes by looking at the futures markets of commodities, equity indices and government bonds. We explore the profitability of cross-sectional and time-series variants of the carry strategy within each asset class but most importantly we investigate the benefits of constructing a multi-asset carry strategy after properly accounting for the covariance structure of the entire universe. Multi-asset carry allocations benefit from the low correlation between asset-class specific carry portfolios and do not exhibit significant downside or volatility risk which have been traditionally associated with the FX carry strategy.
Two additional related research papers have been included into existing free strategy reviews during last 2 week:
What is better – factor of sector investing? A recent paper takes a look on this question a offers an advice. Analysis is related to multiple smart beta strategies:
Briere, Szafarz: Factors vs. Sectors in Asset Allocation: Stronger Together?
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2965346
Abstract:
This paper compares and contrasts factor investing and sector investing, and then seeks a compromise by optimally exploiting the advantages of both styles. Our results show that sector investing is effective for reducing risk through diversification while factor investing is better for capturing risk premia and so pushing up returns. This suggests that there is room for potentially fruitful combinations of the two styles. Presumably, by combining factors and sectors, investors would benefit both from the diversification potential of the former and the risk premia of the latter. The tests reveal that composite strategies are particularly attractive; they confirm that sector investing helps reduce risks during crisis periods, while factor investing can boost returns during quiet times.
Related to commodity trading strategies, mainly to:
#21 – Momentum Effect in Commodities
#22 – Term Structure Effect in Commodities
Rad, Yew Low, Miffre, Faff: How Do Portfolio Weighting Schemes Affect Commodity Futures Risk Premia?
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2977710
Abstract:
We examine whether and to what extent successful equities investment strategies are transferrable to the commodities futures market. We investigate a total of 7 investment strategies that involve optimization and mean-variance timing techniques. To account for the unique characteristics of the commodity futures market, we propose a novel method of classification based on momentum or term structure properties in the formation of long-short portfolios in conjunction with the quantitative strategies from the equities literature. Our strategies generate significant excess returns and risk-adjusted performances as measured by the Sharpe and Sortino ratios and the maximum drawdown. We find no significant correlation between the strategies’ excess returns and common risk factors. There is no evidence that excess returns are a compensation for liquidity risk. The strategies are robust to transaction costs and choice of model parameters and exhibit stable performance across various market environments including times of financial crises.
