New strategies:
#267 – Market Timing Using Lumber/Gold Ratio
Period of rebalancing: weekly
Markets traded: equities, bonds
Instruments used for trading: ETFs, funds, futures, CFDs
Complexity: Simple strategy
Bactest period: 1986 – 2015
Indicative performance: 13.90%
Estimated volatility: 11.80%
Source paper:
Bilello, Gayed: Lumber: Worth It's Weight in Gold Offense and Defense in Active Portfolio Management
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2604248
Abstract:
Prior academic research focuses on commodities in isolation as leading economic indicators, ignoring the message price behavior may have on other asset classes. We find that the relative movement of Lumber to Gold provides important information on economic growth and inflation expectations, which gradually diffuses with a lag to stock and bond markets. Lumber’s sensitivity to housing, a key source of domestic economic growth in the U.S., makes it a unique commodity as it pertains to macro fundamentals and risk-seeking behavior. On the opposite end of the spectrum is Gold, which is distinctive in that it historically exhibits safe-haven properties during periods of heightened volatility and stock market stress. We find that the relationship between Lumber and Gold helps to answer the critical question of when to “play defense” and when to “play offense” within the context of active portfolio management. In this paper, we show that a strategy using the signaling power of Lumber and Gold results in stronger absolute and risk-adjusted returns than a passive buy-and-hold index. This outperformance stems from being more aggressive in a portfolio during periods when Lumber is leading Gold and being more defensive during periods when Gold is leading Lumber. The results are robust to various time frames and across multiple economic and financial market cycles.
#268 – Expected Skewness and Momentum in Stocks
Period of rebalancing: monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1926 – 2011
Indicative performance: 14.30%
Estimated volatility: 31.06%
Source paper:
Jacobs, Regele, Weber: Expected Skewness and Momentum
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2600014
Abstract:
Motivated by the time-series insights of Daniel and Moskowitz (2014), we investigate the link between expected skewness and momentum in the cross-section. The three factor alpha of skewness-enhanced (-weakened) momentum strategies is about twice (half) as large as the traditional momentum alpha. In fact, skewness is among the most important cross-sectional determinants of momentum. Our findings do not neatly fit within a specific prominent theory of momentum. Due to the simplicity of the approach, its economic magnitude, and its existence among large stocks and in the recent past, the results appear difficult to reconcile with the efficient market hypothesis.
New research papers related to existing strategies:
#12 – Pairs Trading with Stocks
Rad, Yew Low, Faff: The Profitability of Pairs Trading Strategies: Distance, Cointegration, and Copula Methods
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2614233
Abstract:
We examine and compare the performance of three different pairs trading strategies – the distance cointegration, and copula methods – on the US equity market from 1962 to 2014 using a time-varying series of trading costs. Using various performance measures, we conclude that cointegration strategy performs as well as the distance method. However, the copula method shows relatively poor performance. Particularly, the distance, cointegration, and copula methods show a mean monthly excess return of 36, 33, and 5 bps after transaction costs and 88, 83, and 43 bps before transaction costs. In recent years, the distance and cointegration methods have presented less trading opportunities whereas this frequency remains stable for the copula method. While liquidity factor is negatively correlated to all strategies' returns, we find no evidence of their correlation to market excess returns. All strategies show positive and significant alphas after accounting for various risk-factors.
#26 – Value (Book-to-Market) Anomaly
Leshem, Goldberg, Cummings: Optimizing Value
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2603308
Abstract:
We investigate how the choice of accounting metric and implementation affect the performance of a value strategy. We find that:
– Strategies based on book-to-price (B/P) and earnings-to-price (E/P) ratios delivered a positive premium over the 60-year horizon from 1951 to 2013.
– E/P had higher return and lower risk than B/P over the full horizon.
– However, B/P outperformed E/P between 1963 and 1990, and that was the basis of the landmark study establishing B/P as the academic standard.
– Strategies based on a blend of B/P and E/P outperformed both single-metric strategies during most 10-year periods between 1973 and 2013.
– Over the same horizon, optimized value strategies had lower tracking error, lower turnover, and a higher information ratio than “rank-and-chop” strategies, which weight high-percentile value stocks by capitalization.
– Sector constraints raised both the Sharpe ratio and the information ratio of an optimized blended-value strategy.
#1 – Adaptive Asset Allocation
#137 – Trendfollowing in Futures Markets
#143 – Momentum and Trendfollowing in Country Equity Indexes
#144 – Trendfollowing Effect in Stocks
#193 – Trendfollowing Effect within REITs
#206 – Trendfollowing Combined with Momentum in Commodity Futures
#220 – Momentum and Trend Following in Global Asset Allocation
Beekhuizen, Hallerbach: Uncovering Trend Rules
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2604942
Abstract:
Trend rules are widely used to infer whether financial markets show an upward or downward trend. By taking suitable long or short positions, one can profit from a continuation of these trends. Conventionally, trend rules are based on moving averages (MAs) of prices rather than returns, which obscures how much weight is assigned to different historical time periods. In this paper, we show how to uncover the underlying historical weighting schemes of price MAs and combinations of price MAs. This leads to surprising and useful insights about popular trend rules, for example that some trend rules have inverted information decay (i.e., distant returns have more weight than recent ones) or hidden mean-reversion patterns. This opens the possibility for improving the trend rule by analyzing the added value of the mean reversion part. We advocate designing trend rules in terms of returns instead of prices, as they offer more flexibility and allow for adjusting trend rules to autocorrelation patterns in returns.
Four additional related research paper have been included into existing free strategy reviews during last 2 week:
#20 – Volatility Risk Premium Effect
Li, Wang: Option-Implied Downside Risk Premiums
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2603857
Abstract:
This article examines downside risk premiums using S&P 500 index (SPX) options. Portfolios are constructed using the index options to replicate the downside risk factors and their average excess returns provide estimates of downside risk premiums. We show that all the market risk premium comes from the downside. The mimicking portfolio returns also show that most of the downside risk premium is associated with large market-level losses that are rarely observed. In contrast, investors seem to require little excess return for bearing moderate market-level losses. Therefore, the downside risk premium is largely a tail risk premium. We compare the downside risk premiums measured from stocks and the options to examine whether the risk is priced consistently across the two markets. Our evidence raises several concerns about the downside risk premium measures from the stock market. Overall, we find no robust evidence that downside risks are priced in the stock market in the same way as in the options market.
Donninger: Hedging Adaptive Put Writing with VIX Futures : The Affenpinscher Strategy
http://www.godotfinance.com/pdf/AffenPinscherStrategy_Rev1.pdf
Abstract:
In a previous working paper I analyzed the Austrian and Doberman Pinscher strategy. The Austrian is an adaptive Put Writing strategy. One hedges the short position with a long Put with a lower strike. The Doberman is more aggressive. The long hedge is omitted. The risk is in both cases reduced by entry and exit conditions. The Affenpinscher uses the same general framework. But the hedging is done with long VIX Futures. There are several VIX Futures available. One selects the VIX Future with the lowest roll-value. The overall performance of the Affenpinscher is between the Austrian and Doberman Pinscher. The Pinscher strategies have generally an attractive performance. The best choice within the family is a matter of risk appetite. Revision 1 extends the historic simulation for the SPX Options till 2014-06-13. As the original parameters are not changed we perform an out of sample test. The attractive properties of the strategy are confirmed. Revision 1 is added before the Conclusion of the original paper. A similar update has been done for the other Pinscher strategies.
#21 – Momentum Effect in Commodities
#22 – Term Structure Effect in Commodities
Benham, Walsh, Obregon: Evaluating Commodity Exposure Opportunities
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2602885
Abstract:
Commodities as an asset class have been in growing demand over the last 40 years, as investors that have traditionally held portfolios of stocks and bonds seek the ‘equity-like’ returns along with diversification potential and inflation hedging characteristics available through commodities investment. However, perhaps due to their relative complexity and the large remaining disagreements in the current literature about the fundamental drivers of commodities returns, investors do not universally agree on the merits of commodity investments. This paper begins by reviewing the existing theories and fundamental drivers of returns from commodity investments to better understand the risks that commodity investors are compensated for bearing. From this perspective we will evaluate existing methods of commodity investing with a focus on why the risk premia these strategies capture are likely to persist in the future.
#198 – Time Series Momentum Effect
Donninger: Selling Volatility Insurance: The Sidre- and Most-Strategy
http://www.godotfinance.com/pdf/VIXFuturesTrading_Rev1.pdf
Abstract:
This working-paper examines and improves a VIX-Futures calendar-spread strategy proposed in the literature. The strategy relies on the typical term-structure of VIX-futures. Additionally a naked short-selling strategy is considered. The strategies have similar characteristics to selling Puts on the S&P-500. There is some risk, but also a lot of fun. The strategies are an interesting alternative investment-vehicle to boost the performance of a fund.
