New strategies:
#168 – Commodities Timing based on a Monetary Conditions
Period of rebalancing: Daily
Markets traded: commodities
Instruments used for trading: ETFs, futures
Complexity: Moderately complex strategy
Bactest period: 1970 – 1999
Indicative performance: 20.46%
Estimated volatility: 13.86%
Source paper:
Jensen, Mercer: Tactical Asset Allocation and Commodity Futures
http://www.pinnaclecta.com/TACTICAL%20ASSET%20ALLOCATION%20FOR%20COMMODITY%20FUTURES.pdf
Abstract:
We examine the diversification benefits of adding managed and unmanaged commodity futures to a traditional portfolio that consists of US equities, foreign equities, corporate bonds and treasury bills from 1970 through 1999. Consistent with previous evidence, we find that commodity futures substantially enhance portfolio performance for investors, with managed futures providing the largest benefit. Importantly, we show that the benefits of adding commodity futures (both managed and unmanaged) accrues almost exclusively during periods when the Federal Reserve is following a restrictive monetary policy. Overall, the findings indicate that it is necessary to gauge monetary conditions to determine the optimal allocation for commodity futures within a portfolio. Furthermore, the findings suggest that metals and agricultural futures constracts offer the most diversification benefits for investors, and investors should consider using monetary conditions to determine whether a short or long position should be established in a particular type of contract.
#169 – Exploiting Option Information in the Equity Market
Period of rebalancing: Weekly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Very complex strategy
Bactest period: 1996-2009
Indicative performance: 7.61%
Estimated volatility: 6.69%
Source paper:
Baltussen, Van der Grient, De Groot, Zhou, Hennink: Exploiting Option Information in the Equity Market
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2001461
Abstract:
Public option market information contains exploitable information for equity investors for an investable universe of liquid large-cap stocks. Strategies based on several option measures predict returns and alphas on the underlying stock. Transaction costs are an important factor given the high turnover of these strategies, but significant net alphas can be obtained when using a simple transaction cost reducing approach. These findings suggest that information diffuses from the option market into the underlying stock market.
New research papers related to existing strategies:
#41 – Turn of the Month in Equity Indexes
Carchano, Tornero: Calendar Anomalies in Stock Index Futures
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1958587
Abstract:
There exist a large and increasing number of papers that describe different calendar anomalies in stock markets. Although empirical evidence suggests that seasonal effects disappeared after the early 1990s, new studies and approaches assert the continuation of some anomalies in stock indexes. In this paper, we present a comprehensive study of 188 possible cyclical anomalies in S&P 500, DAX and Nikkei stock index futures contracts from 1991 to 2008. Frictions in futures markets, unlike spot markets frictions, make it feasible to produce economically significant profits from trading rules based on calendar effects. By applying a percentile-t-bootstrap and Monte Carlo methods, our analysis reveals that the turn-of-the-month effect in S&P 500 futures contracts is the only calendar effect that is statistically and economically significant and persistent over time.
#110 – Speculators' Effect in Commodities
#111 – Hedgers' Effect in Commodities
Ederington, Dewally, Fernando: Determinants of Trader Profits in Futures Markets
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1781975
Abstract:
Using a unique proprietary data set of positions held by all large traders in the crude oil, gasoline, and heating oil futures markets, we explore determinants of individual traders’ profits/losses. Consistent with the risk premium hypothesis, hedgers’ mean futures position profits are significantly negative while speculators’ profits (hedge funds especially) are significantly positive. We find strong support for the hedging pressure hypothesis in that the profits of individual traders (whether speculators or hedgers) are a strong positive function of the extent to which the trader holds short (long) futures positions when likely hedgers in the aggregate are long (short). We also find that profits on long futures positions vary inversely with inventories and directly with price volatility, as predicted by the modern theory of storage. However, inventories and volatility are less important in explaining differences in profits among different trader types than hedging pressure. We find no evidence of momentum trading or that it would be profitable if traders engaged in it. Market makers realize significant losses on their overnight holdings, which is consistent with findings in prior studies for other markets that any information advantages they may possess are short-lived. While some individual traders may have an informational advantage, the trading profits of speculators in general, and hedge funds in particular, are primarily due to exploiting price differentials caused by hedging pressure, i.e., to holding long (short) positions when hedgers in the aggregate are net short (long). Thus, our evidence indicates that speculator profits are largely due to taking positions opposite of hedgers and thereby taking on risk that hedgers do not wish to bear.
