New strategy:
#322 – Rank Effect for Commodities
Period of rebalancing: daily
Markets traded: commodities
Instruments used for trading: futures, CFDs
Complexity: Simple strategy
Bactest period: 2010-2016
Indicative performance: 23.20%
Estimated volatility: not stated
Source paper:
Fernholz, Koch: The Rank Effect for Commodities
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2826964
Abstract:
We uncover a large and significant low-minus-high rank effect for commodities across two centuries. There is nothing anomalous about this anomaly, nor is it clear how it can be arbitraged away. Using nonparametric econometric methods, we demonstrate that such a rank effect is a necessary consequence of a stationary relative asset price distribution. We confirm this prediction using daily commodity futures prices and show that a portfolio consisting of lower-ranked, lower-priced commodities yields 23% higher annual returns than a portfolio consisting of higher-ranked, higher-priced commodities. These excess returns have a Sharpe ratio nearly twice as high as the U.S. stock market yet are uncorrelated with market risk. In contrast to the extensive literature on asset pricing factors and anomalies, our results are structural and rely on minimal and realistic assumptions for the long-run properties of relative asset prices.
New research papers related to existing strategies:
#118 – Time-Series Momentum
#137 – Trendfollowing in Futures Markets
Peltomaki, Agerback, Gudmundsen-Sinclair: The Long and Short of Trend Followers
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2836389
Abstract:
We propose the use of short and long portfolios of trend-following strategies to analyze their risk and return characteristics. We find that their exposures are time-varying, depend on the market state, and that returns to their long and short sides in the same asset are not comparable. In addition, we present evidence for occasional long-biased discretion by CTA managers. Our findings are in line with the adaptive markets hypothesis, and the main lesson of our study is that the long and short sides should be differentiated in the analysis of dynamic investment strategies.
#21 – Momentum Effect in Commodities
Chaves, Viswanathan: Momentum and Mean-Reversion in Commodity Spot and Futures Markets
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2833003
Abstract:
We study momentum and mean-reversion strategies in commodity futures prices and their relationship to momentum and mean reversion in commodity spot prices. We find that momentum performs well in futures markets, but not in spot markets, and that mean-reversion performs well in spot markets, but not in futures markets. A decomposition of the basis (the slope of the term-structure of futures prices) into expected risk premiums and expected changes in spot prices helps us shed some light on the different results across the futures and spot markets. Most interestingly, we find that momentum in futures prices cannot be explained by a sustained trend in spot prices.
#183 – Optimized Currency Portfolios
#230 – Mean Variance Carry Trade Strategy
Maurer, To, Tran: Optimal Factor Strategy in FX Markets
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2797483
Abstract:
Given a diffusion setting in foreign exchange (FX) markets, we construct a dynamic currency carry trade strategy that earns the (theoretically) maximum attainable Sharpe ratio. Empirically, our strategy earns a remarkable out-of-sample Sharpe ratio of 1.04 before and 0.78 after accounting for transaction costs. It substantially outperforms other popular carry trade strategies in terms of Sharpe ratio, skewness, kurtosis, maximum drawdown, expected recovery time, and percentage of positive returns. Popular factor pricing models in international finance do not explain the superior performance.
Two additional related research papers have been included into existing free strategy reviews during last 2 week:
#12 – Pairs Trading with Stocks
Donninger: Is Daily Pairs Trading of ETF-Stocks Profitable?
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2816288
Abstract:
Pairs trading is a venerable trading strategy. There is agreement that it worked fine in the far past. But it is less clear if it still profitable today. In this working paper the universe of eligible pairs is defined by the holdings of a given ETF. It is shown that the stocks must be from ETFs which select high-quality, low-volatility stocks. The usual closeness measure presented in the literature performs poor. The paper presents a simple and clearly superior alternative based on zero-crossings. The strategy performs with the correct universe and the improved pairs selection rule before trading costs quite fine. It depends on the assumed trading costs if this is also in real-trading life the case.
