Quantpedia Update – 18th February 2017

New strategies:

#335 – Cross-Sectional One-Month Equity ATM Straddle Trading Strategy

Period of rebalancing: monthly
Markets traded: equities
Instruments used for trading: options
Complexity: Very complex strategy
Bactest period: 1996-2015
Indicative performance: 34.58%
Estimated volatility: 12.70%

#336 – Cross-Sectional Six-Month Equity ATM Straddle Trading Strategy

#337 – Cross-Sectional Six- Minus One-Month Equity ATM Straddle Calendar Trading Strategy

Source paper for all 3 strategies:

Campasano, Linn: Understanding and Trading the Term Structure of Volatility
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2871616
Abstract:
We extensively study the term structure of volatility in individual equity options. We begin by studying the behavior of implied volatility in the cross section. We examine the joint dynamics of short maturity and long maturity implied volatility in order to gain a thorough understanding of how volatility term structure evolves. We uncover a number of stylized facts which, to the best of our knowledge, we are the first to empirically document. We then propose a simple framework of term structure dynamics that captures the features documented in our empirical study. This simple framework is illustrative and gives an intuitive way to understand the dynamics of the volatility term structure seen in the cross section. Using the intuition gleaned from our analysis, we examine strategies for trading volatility. Consistent with the term structure dynamics, we uncover a number of profitable volatility trading strategies across maturities. We further examine the extent to which profitability of these trading strategies is due to an interaction between volatility term structure and realized volatility.

New research papers related to existing strategies:

#142 – Seasonality in Gold

Lanfear, Lioui, Siebert: Flight to Gold: Extreme Weather Events and Stock Returns
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2894147
Abstract:
Using an event study approach at the stock level, we examine the effect of North Atlantic hurricanes on U.S. stock returns over the period January 1990 to December 2014. We document a substantial economic impact of hurricanes on the aggregate market: an accumulated loss of 0.522% (6.264% annualized) to 30 days post-landfall. For Industry Portfolios encompassing the entire U.S. stock market, we document several patterns. Many manufacturing-based and consumer-focused Industry Portfolios exhibit consistently negative abnormal returns over the event window from formation of the hurricane to 30 days post-landfall. Although the market tends to incorporate the foreseen loss related to the hurricane before landfall, there is no recovery post-landfall and the losses continue to accumulate. One industry in particular reacts differently, namely Gold. Gold-related stocks experience substantial positive abnormal returns during these extreme weather events, which suggests that this commodity acts as an endogenous safe asset during the market disruption caused by such meteorological phenomenon. We also show that degradation in liquidity of Gold stocks' is of the same magnitude as other industries which fairly rule out a flight to liquidity.

#254 – Federal Open Market Committee Meeting Effect on US Dollar

Mueller, Tahbaz-Salehi, Vedolin: Exchange Rates and Monetary Policy Uncertainty
http://www.columbia.edu/~at2761/FXUncertainty.pdf
Abstract:
We document that a trading strategy that is short the U.S. dollar and long other currencies exhibits significantly larger excess returns on days with scheduled Federal Open Market Committee (FOMC) announcements. We also show that these excess returns (i) are higher for currencies with higher interest rate differentials vis-a-vis the U.S.; (ii) increase with uncertainty about monetary policy; and (iii) intensify when the Federal Reserve adopts a policy of monetary easing. We interpret these excess returns as a compensation for monetary policy uncertainty within a parsimonious model of constrained financiers who intermediate global demand forcurrencies.

Three additional related research papers have been included into existing free strategy reviews during last 2 week:

#7 – Volatility Effect in Stocks – Long-Only Version

Blitz: Are Hedge Funds on the Other Side of the Low-Volatility Trade?
https://papers.ssrn.com/sol3/papers2.cfm?abstract_id=2898034
Abstract:
The low-volatility anomaly is often attributed to limits to arbitrage, such as leverage, short-selling and benchmark constraints. One would therefore expect hedge funds, which are typically not hindered by these constraints, to be the smart money that is able to benefit from the anomaly. This paper finds that the return difference between low- and high-volatility stocks is indeed a highly significant explanatory factor for aggregate hedge fund returns, but with the opposite sign, i.e. hedge funds tend to bet not on, but against the low-volatility anomaly. This finding has several important implications. First, it implies that limits to arbitrage are not the key driver of the low-volatility anomaly. Second, it argues against the notion that the anomaly may be disappearing or may have turned into an ‘overcrowded’ trade. A final implication is that the return difference between low- and high-volatility stocks should be recognized as a key explanatory factor for hedge fund returns.

#26 – Value (Book-to-Market) Anomaly

Folkinshteyn, Meric, Meric: Value and Growth Stock Price Behavior During Stock Market Declines
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2814956
Abstract:
Using data for five major stock market declines during the 1987-2008 period, this paper provides evidence that value stocks are generally less sensitive to major stock market declines than growth stocks, controlling for beta, firm size, and industry group. Further analysis using several hundred different significant market move events between 1980 and 2015 confirms the observation that value stocks tend to outperform both the market average and growth stocks during market declines. The implication for investment practitioners is that following a value strategy does not lead one to assume greater sensitivity to unfavorable market conditions.

Plus an interesting academic paper related to multiple equity factors:

Blitz: Are Exchange-Traded Funds Harvesting Factor Premiums?
https://papers.ssrn.com/sol3/papers2.cfm?abstract_id=2912287
Abstract:
Some exchange-traded funds (ETFs) are specifically designed for harvesting factor premiums, such as the size, value, momentum and low-volatility premiums. Other ETFs, however, may implicitly go against these factors. This paper analyzes the factor exposures of US equity ETFs and finds that, indeed, for each factor there are not only funds which offer a large positive exposure, but also funds which offer a large negative exposure towards that factor. On aggregate, all factor exposures turn out to be close to zero, and plain market exposure is all that remains. This finding argues against the notion that factor premiums are rapidly being arbitraged away by ETF investors, and also against the related concern that factor strategies are becoming ‘overcrowded trades’.