New strategies:
#144 – Trendfollowing Effect in Stocks
Period of rebalancing: Daily
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1983- 2004
Indicative performance: 15.50%
Estimated volatility: 15.60%
Source paper:
Cole Wilcox, Eric Crittenden: Does Trend Following Work on Stocks?
http://www.trendfollowing.com/whitepaper/Does_trendfollowing_work_on_stocks.pdf
Abstract:
Over the years many commodity trading advisors, proprietary traders, and global macro hedge funds have successfully applied various trend following methods to profitably trade in global futures markets. Very little research, however, has been published regarding trend following strategies applied to stocks. Is it reasonable to assume that trend following works on futures but not stocks? We decided to put a long only trend following strategy to the test by running it against a comprehensive database of U.S. stocks that have been adjusted for corporate actions1. Delisted2 companies were included to account for survivorship bias3. Realistic transaction cost estimates (slippage & commission) were applied. Liquidity filters were used to limit hypothetical trading to only stocks that would have been liquid enough to trade, at the time of the trade. Coverage included 24,000+ securities spanning 22 years. The empirical results strongly suggest that trend following on stocks does offer a positive mathematical expectancy4, an essential building block of an effective investing or trading system
#145 – Geographic Momentum in Stocks
Period of rebalancing: Monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Very complex strategy
Bactest period: 1998-2010
Indicative performance: 19.84%
Estimated volatility: 19.56%
Source paper:
Nguyen: Geographic Momentum
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1921537
Abstract:
Do investors pay attention to foreign market conditions when they evaluate multinational corporations? Using geographic segment disclosures by U.S. multinational companies, I find that stock prices do not promptly incorporate information regarding changes in foreign market conditions, which in turn generates return predictability in the cross-section of firms with foreign operations. A simple trading strategy that exploits geographic information yields risk adjusted return of 139 basis points per month, or 16.68% per year. The predictability cannot be explained by firm's own momentum, industry momentum, post-earnings-announcement drift, or exposure to emerging market risk. Consistent with the investors' inattention hypothesis, I further document that firms with less analyst coverages, firms with lower institutional holdings, small and medium sized firms, and firms with more complex foreign sales compositions, exhibit stronger return predictability. This paper is the first to document the predictable link between foreign country level index returns and firm level stock returns.
#146 – Timing Commodity Momentum
Period of rebalancing: Monthly
Markets traded: commodities
Instruments used for trading: futures, CFDs
Complexity: Moderately complex strategy
Bactest period: 1994 – 2007
Indicative performance: 30.69%
Estimated volatility: 11.09%
Source paper:
Basu, Miffre: Timing Commodity Momentum
http://www.edhec-risk.com/edhec_publications/all_publications/RISKReview.2009-07-06.0335/attachments/EDHEC%20Working%20Paper%20Timing%20Commodity%20Momentum.pdf
Abstract:
We examine simple timing strategies for commodity momentum, based on whether the market is in backwardation or contango. We find that these timed strategies outperform winner, loser and momentum strategies. Our analysis thus provides evidence that commodity momentum is a dynamic phenomenon, and has implications for commodity managers as it provides simple active strategies that outperform passive momentum benchmarks.
#147 – Shorting Goodwill
Period of rebalancing: Yearly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Moderately complex strategy
Bactest period: 2002 – 2008
Indicative performance: 17.40%
Estimated volatility: 18.56%
Source paper:
Li, Sloan: Has Goodwill Accounting Gone Bad?
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1803918
Abstract:
SFAS 142 replaces the systematic amortization of goodwill with a periodic impairment test. We examine the impact of this standard on the accounting for and valuation of goodwill. Our results indicate that the new accounting results in inflated goodwill balances and untimely impairments. Goodwill impairments lag deteriorating operating performance and stock returns by at least two years. Moreover, investors do not appear to fully anticipate the delayed goodwill impairments, since firms with deteriorating operating performance and large goodwill balances have both predictable future impairments and negative abnormal stock returns. Overall, our results suggest that management exploits the discretion afforded by SFAS 142 to delay goodwill impairments and that this causes earnings and stock prices to be temporarily inflated.
#148 – Value/Growth Spread in Japan
Period of rebalancing: Yearly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1986-2001
Indicative performance: 17.60%
Estimated volatility: 32.70%
Source paper:
Noma: VALUE INVESTING AND FINANCIAL STATEMENT ANALYSIS
http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/18701/1/HJcom0440100290.pdf
Abstract:
This study investigates whether a simple accounting-based fundamental analysis can outperform the market. In this study, I use a fundamental signal (F_SCORE) to discriminate between eventual winners and losers. F_SCORE is based on a combination of traditional fundamentals such as ROA, cash flow from operations, and operating margin. I demonstrate that the mean return can be increased by at least 7.8% through hedging strategy that buys high F_SCORE firms and that shorts low F_SCORE firms. In particular, an investment strategy that buys high book-to-market (BM) firms with high F_SCORE and shorts low BM firms with low F_SCORE earns a 17.6% annual return. In other words the results are robust across a variety of partitions including size, share price, and trading volume. This study reveals that F_SCORE can predict future earnings. Further, empirical results do not support a risk-based explanation for the investment strategy. Overall, the results of the present study suggest that life cycle hypothesis advocated by Lee and Swaminathan[2000] holds true.
#149 – FX Volatility Effect
Period of rebalancing: 6-Months
Markets traded: currencies
Instruments used for trading: futures, forwards, swaps, CFDs
Complexity: Moderately complex strategy
Bactest period: 1983 – 2009
Indicative performance: 4.20%
Estimated volatility: 8.68%
Source paper:
Menkhoff, Sarno, Schmeling, Schrimpf: Carry Trades and Global Foreign Exchange Volatility
http://www.essex.ac.uk/ebs/research/efc/seminar_papers/FX_LSarno.pdf
Abstract:
We investigate the relation between global foreign exchange (FX) volatility risk and the cross-section of excess returns arising from popular strategies that borrow in low interest rate currencies and invest in high-interest rate currencies, so-called `carry trades'. We find that high interest rate currencies are negatively related to innovations in global FX volatility and thus deliver low returns in times of unexpected high volatility, when low interest rate currencies provide a hedge by yielding positive returns. Our proxy for global FX volatility risk captures more than 90% of the cross-sectional excess returns in five carry trade portfolios. In turn, these results provide evidence that there is an economically meaningful risk-return relation in the FX market. Further analysis shows that liquidity risk also matters for expected FX returns, but to a lesser degree than volatility risk, and that our volatility risk proxy also prices other cross sections of assets returns, such as currency momentum portfolios, stock return momentum portfolios, corporate and international bonds, and individual currency returns.
#150 – FX Volatility Effect ver. 2
Period of rebalancing: Monthly
Markets traded: currencies
Instruments used for trading: futures, forwards, swaps, CFDs
Complexity: Simple strategy
Bactest period: 1985 – 2009
Indicative performance: 3.17%
Estimated volatility: 9.56%
Source paper:
Kroencke, Schindler, Schrimpf: International Diversification Benefits with Foreign Exchange Investment Styles
http://ftp.zew.de/pub/zew-docs/dp/dp11028.pdf
Abstract:
Style-based investments and their role for portfolio allocation have been widely studied by researchers in stock markets. By contrast, there exists considerably less knowledge about the portfolio implications of style investing in foreign exchange markets. Indeed, style-based investing in foreign exchange markets is nowadays very popular and arguably accounts for a considerable fraction in trading volumes in foreign exchange markets. This study aims at providing a better understanding of the characteristics and behavior of stylebased foreign exchange investments in a portfolio context. We provide a comprehensive treatment of the most popular foreign exchange investment styles over the period from January 1985 to December 2009. We go beyond the well known carry trade strategy and investigate further foreign exchange investment styles, namely foreign exchange momentum strategies and foreign exchange value strategies. We use traditional mean-variance spanning tests and recently proposed multivariate stochastic dominance tests to assess portfolio investment opportunities from foreign exchange investment styles. We nd statistically signi cant and economically meaningful improvements through style-based foreign exchange investments. An internationally oriented stock portfolio augmented with foreign exchange investment styles generates up to 30% higher return per unit of risk within the covered sample period. The documented diversi cation bene ts broadly prevail after accounting for transaction costs due to rebalancing of the style-based portfolios, and also hold when portfolio allocation is assessed in an out-of-sample framework.
#151 – EBIDTA/TEV Measure Effect
Period of rebalancing: Yearly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1971 – 2010
Indicative performance: 17.66%
Estimated volatility: 20.09%
Source paper:
Gray, Vogel: Analyzing Valuation Measures: A Performance Horse-Race Over the Past 40 Years
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1970693
Abstract:
We compare the investment performance of portfolios sorted on different valuation measures. EBITDA/TEV has historically been the best performing metric and outperforms many investor favorites such as price-to-earnings, free-cash-flow to total enterprise value, and book-to-market. We also explore the investment potential of long-term valuation ratios, which replace one-year earnings with an average of long-term earnings. In contrast to prior empirical work, we find that long-term ratios add little investment value over standard one-year valuation metrics.
#152 – Momentum Effect in REITs
Period of rebalancing: Monthly
Markets traded: REITs
Instruments used for trading: stocks
Complexity: Simple strategy
Bactest period: 1980 – 2008
Indicative performance: 9.51%
Estimated volatility: not stated
Source paper:
Derwall, Huij, Brounen, Marquering: REIT MOMENTUM AND THE PERFORMANCE OF REAL ESTATE MUTUAL FUNDS
http://arno.unimaas.nl/show.cgi?fid=16110
Abstract:
REITs exhibit a large and prevalent momentum effect that is not captured by conventional factor models. We show that this REIT momentum anomaly hampers proper judgments about the active management of REIT portfolios. By contrast, a REIT momentum factor provides incremental explanatory power to performance attribution models for REIT portfolios. Using this factor, we find that REIT momentum explains a great deal of the abnormal returns that actively managed REIT mutual funds earn in aggregate according to earlier related studies. Accounting for exposure to REIT momentum also materially influences cross-sectional comparisons of the performance of REIT mutual funds. Our results have important implications for performance evaluation, alpha-beta separation, and manager selection and compensation.
#153 – Post-Earnings Announcement Drift in REITs
Period of rebalancing: Quarterly
Markets traded: REITs
Instruments used for trading: stocks
Complexity: Simple strategy
Bactest period: 1982 – 2008
Indicative performance: 21%
Estimated volatility: 13.25%
Source paper:
Price, Gatzlaff, Sirmans: Information Uncertainty and the Post-Earnings-Announcement Drift Anomaly: Insights from REITs
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1633542
Abstract:
This is the first study to examine the post-earnings-announcement drift anomaly in a Real Estate Investment Trust (REIT) context. The efficient markets hypothesis suggests that unexpected earnings should be fully incorporated into asset prices soon after being publicly announced. We hypothesize that publicly announced earnings signals may be more certain for REITs due to the presence of a parallel (private) asset market, suggesting less drift for REIT stocks. However, we find a large REIT drift component that is both statistically and economically significant. Furthermore, while the initial earnings surprise response is more muted for REITs, we find that the magnitude of the drift is significantly larger for REITs than for ordinary common stocks (NonREITs). Thus, information does not appear to move between the private and public asset markets in such a way as to render REIT earnings signals more certain than NonREIT earnings signals.
#154 – Price Shocks Effect
Period of rebalancing: Monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1963 – 2006
Indicative performance: 15.80%
Estimated volatility: 14.66%
Source paper:
Lu, Wang, Wang: Price Shocks, News Disclosures, and Asymmetric Drifts
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1445095
Abstract:
Motivated by investor disagreement models and the information disclosure literature, we examine how stock price shocks in the absence of public announcement of firm specific news affect future stock returns. We find that both large short term price drops and hikes are followed by negative abnormal returns over the subsequent twelve months. The asymmetric drifts, return continuation for negative price shocks versus return reversal for positive ones, are in sharp contrast to the general findings of symmetric drifts in corporate event studies (e.g., Ball and Brown (1968)), but consistent with predictions from disagreement models. We also find that price shocks associated with public news events are followed by significantly weaker downward drifts, suggesting that reduction of information asymmetry/uncertainty from public disclosures mitigates disagreementinduced overpricing. Our findings give rise to a revised momentum strategy that would have an annualized abnormal return of 21%, suggesting that optimistic investors have suffered substantial losses.
#155 – Momentum Combined with Volatility Effect in Stocks
Period of rebalancing: Monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1964 – 2009
Indicative performance: 16.46%
Estimated volatility: 19.22%
Source paper:
Wei: Do Momentum and Reversals Coexist?
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1679464
Abstract:
The answer to the title question is "Yes." Examining stocks traded on the NYSE, AMEX and NASDAQ for the period of 1964 to 2009, this study discovers that, while momentum prevails among small stocks, momentum and reversals coexist among large stocks for a holding period of up to six months. The momentum/reversal divide is along the volatility dimension: Large-cap/low-volatility stocks exhibit reversals while large-cap/high-volatility stocks experience momentum. This new discovery cannot be fully rationalized with either risk-based or behavioral-based explanations.
#156 – Reversal Combined with Volatility Effect in Stocks
Period of rebalancing: Monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1964 – 2009
Indicative performance: 10.74%
Estimated volatility: 8.70%
Source paper:
Wei: Do Momentum and Reversals Coexist?
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1679464
Abstract:
The answer to the title question is "Yes." Examining stocks traded on the NYSE, AMEX and NASDAQ for the period of 1964 to 2009, this study discovers that, while momentum prevails among small stocks, momentum and reversals coexist among large stocks for a holding period of up to six months. The momentum/reversal divide is along the volatility dimension: Large-cap/low-volatility stocks exhibit reversals while large-cap/high-volatility stocks experience momentum. This new discovery cannot be fully rationalized with either risk-based or behavioral-based explanations.
#157 – Consumer Sentiment Effect
Period of rebalancing: Monthly
Markets traded: equities
Instruments used for trading: funds, ETFs, futures, CFDs
Complexity: Simple strategy
Bactest period: 1979 – 2000
Indicative performance: 11%
Estimated volatility: not stated
Source paper:
Charoenrook: Does Sentiment Matter?
http://www2.owen.vanderbilt.edu/fmrc/pdf/wp2002-06.pdf
Abstract:
Whether investor sentiment has any bearing on asset returns has long been a topic of interest in finance. In this paper I examine whether sentiment, as measured by yearly change in the University of Michigan Consumer Sentiment Index, affects stock returns. I find that changes in consumer sentiment reliably predict excess stock market returns at one-month and one-year horizons over 1979-2000 and 1955-2000 periods. Its univariate prediction is stronger than other popular stock return predictors. Change in consumer sentiment performs better than an ARI benchmark model in out-of-sample forecasting tests. Changes in consumer sentiment predict future excess stock returns after controlling for dividend yield, the book-to-market ratio of the Dow Jones Industrial Average, the slope of the term structure, the yield spread between Baa and Aaa bonds, the short rate yield, lagged excess market returns, and the consumption-wealth ratio. The predictability of change in consumer sentiment is mostly unrelated to economic cycles as measured by real GDP growth or consumption growth.
#158 – Leverage Effect in Stocks
Period of rebalancing: yearly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1965 – 2008
Indicative performance: 6.32%
Estimated volatility: not stated
Source paper:
Sivaprasad, Muradoglu: Using Firm Level Leverage as an Investment Strategy
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1031198
Abstract:
We use an investment strategy based on firm level capital structures. Investing in low leverage firms yields abnormal returns of 4.43 percent per annum. If an investor holds a portfolio of low leverage and low market to book ratio firms abnormal returns increase to 16.18 percent per annum. A portfolio of low leverage and low market risk yields abnormal returns of 6.67 percent and a portfolio of small firms with low leverage earns 5.37 percent per annum. We use the Fama-Macbeth (1973) methodology with modifications. We confirm that portfolios based on low leverage earn higher returns in longer investment horizons. Our results are robust to other risk factors and the risk class of the firm.
#159 – Value Effect in REITs
Period of rebalancing: Yearly
Markets traded: REITs
Instruments used for trading: stocks
Complexity: Simple strategy
Bactest period: 1990 – 2004
Indicative performance: 7.30%
Estimated volatility: 7.90%
Source paper:
Addae-Dapaah, Peiying: Investing in REITS: Contrarian versus Momentum
http://www.prres.net/papers/Kwame_Investing_In_REITS_Constrarian_Versus.pdf
Abstract:
Notwithstanding the preponderance of evidence supporting the superiority of the contrarian investment strategy, other researchers have adduced evidence in support of superior performance from momentum investment strategy. This paper uses data for REITS stocks traded on the NYSE, AMEX and NASDAQ from 1990 to 2007 to ascertain the relative superiority of the contrarian and momentum REITS investment strategies. Furthermore, the paper is aimed at ascertaining the rationale for value/growth premium, if any (i.e. if risk is a credible explanation for value/growth premium). The value-growth paradigm forms the theoretical basis of the paper. Two methods: a simple sorting procedure based on the book-to-market value ratio (for contrarian) and six-months price momentum (for the momentum strategy) vis-à-vis Fama-French model are used to examine the time-varying risk of value and growth REIT portfolios. This is followed by a stochastic dominance test to verify the relative performance and risk of value and growth REIT portfolios. While the results show that both strategies provide superior performance, that of the momentum strategy is limited to only twelve months holding period. The growth premium for the momentum strategy, in addition to not being statistically significant, declines after twelve months. In contrast, the superior performance of the contrarian strategy increases over time and is found to be statistically significant for holding periods of more than, or equal to, six months. Furthermore, the results show that the superior performances are not a compensation for risk. This implies that investor psychology could be the driver for the value/growth premia.
#160 – Long-Term PE Ratio Effect in Stocks
Period of rebalancing: Yearly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1975 – 2003
Indicative performance: 28.95%
Estimated volatility: not stated
Source paper:
Anderson, Brooks: The Long-Term Price-Earnings Ratio
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=739664
Abstract:
The price-earnings effect has been thoroughly documented and widely studied around the world. However, in existing research it has almost exclusively been calculated on the basis of the previous year’s earnings. We show that the power of the effect has until now been seriously underestimated, due to taking too short-term a view of earnings. We look at all UK companies since 1975, and using the traditional P/E ratio we find the difference in average annual returns between the value and glamour deciles to be 6%, similar to other authors’ findings. We are able to almost double the value premium by calculating P/E ratios using earnings averaged over the last eight years. Averaging, however, implies equal weights for each past year. We further enhance the premium by optimising the weights of the past years of earnings in constructing the P/E ratio.
#161 – Lunar Cycle in Precious Metals
Period of rebalancing: Daily
Markets traded: commodities
Instruments used for trading: ETFs, CFDs, futures
Complexity: Simple strategy
Bactest period: 1998 – 2007
Indicative performance: 5.20%
Estimated volatility: not stated
Source paper:
Lucey: Lunar Seasonality in Precious Metal Returns?
http://brianmlucey.files.wordpress.com/2011/05/lunargold_ael.pdf
Abstract:
We demonstrate for the first time the existence of a lunar cycle on precious metal returns. This appears to be more pronounced in silver than gold, with very little evidence for an effect in platinum.
#162 – Momentum Effect in Stocks in Small Portfolios
Period of rebalancing: Yearly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Simple strategy
Bactest period: 1988 – 2006
Indicative performance: 32.00%
Estimated volatility: not stated
Source paper:
Siganos: Can small investors exploit the momentum effect?
http://eprints.gla.ac.uk/33326/1/33326.pdf
Abstract:
This study uses U.K. data and investigates whether small investors can exploit the continuation effect in share prices. Individual traders are not in a financial position to buy and sell short hundreds of firms, as suggested by existing academic research, and thus this study uses extreme performance companies to implement the strategy. We find that strong momentum gains appear when extreme winners and losers are employed. These returns remain strong even after considering the transaction costs of implementing such strategies, including commissions, stamp duty, selling-short costs, and bid-ask spread. Overall, we show that a relatively large number of small investors can enjoy momentum gains, providing some evidence against stock market efficiency.
