New strategies:
#178 – Abnormal Volume Effect within Stocks
Period of rebalancing: Daily
Markets traded: equities
Instruments used for trading: stocks
Complexity: moderately complex strategy
Bactest period: 1997 – 2003
Indicative performance: 33.91%
Estimated volatility: not stated
Source paper:
Bajo: THE INFORMATION CONTENT OF ABNORMAL TRADING VOLUME
http://www.efmaefm.org/efma2006/papers/367857_full.pdf
Abstract:
This paper investigates the role of abnormal trading volume on the Italian equity market as revealing new information. In an efficient market, volume should be correlated to simultaneous returns, but should have no predictive power for future returns. When new information arrives in the market, prices should adjust to a new equilibrium and the increase of volume should be the natural effect of informed trades. However, empirical evidence documents that the release of new information, price changes and volume increases are not necessarily simultaneous phenomena, as market efficiency would suggest. If information is not perfectly spread out in the market, but rather held by more informed traders, observation of trading volumes may enhance the information set. The hypothesis is that large changes in volume, especially when not accompanied by any news disclosure, incorporate a non-public information content and signal future excess returns. Evidence confirms this intuition. I find strong excess returns (higher when no new information is simultaneously released) around extreme trading levels and strong evidence of price continuation, even though mainly concentrated on the day after the event. The magnitude of post-event excess returns is also profitably tradable with a portfolio strategy. These findings strongly corroborate the hypothesis of an information content of abnormal volume.
New research papers related to existing strategies:
#15 – Momentum Effect in Country Equity Indexes
Urrutia, Vu: DO MOMENTUM STRATEGIES GENERATE PROFITS IN EMERGING STOCK MARKETS?
http://www.efmaefm.org/efma2005/papers/269-vu_paper.pdf
Abstract:
This paper empirically investigates whether momentum strategies applied to past returns of national stock indices generate profits. Emphasis is placed in emerging capital markets of Africa, Asia, Europe, Latin America, and the Middle East. We find that the extra returns from momentum strategies are larger for emerging markets than for developed markets. We also find that momentum profits are higher in the pre-market liberalization period than in the post- liberalization period. We postulate that the higher momentum profits generated by emerging markets are due to market isolation and that market liberalization reforms introduced in these countries tend to reduce the profits from momentum strategies.
#21 – Momentum Effect in Commodities
#22 – Term Structure Effect in Commodities
#23 – Momentum Effect Combined with Term Structure in Commodities
Switzer, Jiang: Market Efficiency and the Risks and Returns of Dynamic Trading Strategies with Commodity Futures
http://www.efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS/2010-Aarhus/EFMA2010_0135_fullpaper.pdf
Abstract:
This paper investigates dynamic trading strategies, based on structural components of returns, including risk premia, convenience yields, and net hedging pressures for commodity futures. Significant momentum profits are identified in both outright futures and spread trading strategies when the spot premium and the term premium are used to form winner and loser portfolios. The existence of profits from active trading strategies based on momentum is consistent with behavioral finance and behavioral psychology models in which market participants irrationally underreact to information and trends. Profits from active strategies based on winner and loser portfolios are partly conditioned on term structure and net hedging pressure effects. High returns from a popular momentum trading strategy based on a ranking period of 12 months and a holding period of one month dissipate after accounting for hedging pressure effects, consistent with the rational markets model.
#49 – S&P 500 Index Addition Effect
Gastineau: The Cost of Trading Transparency: What We Know, What We Don’t Know and How We Will Know
http://www.etfconsultants.com/images/Measuring_Cost_of_Trading_Transparency.pdf
Abstract:
Results from several major studies of index composition changes indicate that trading transparency accounts for more than half of the market impact cost of composition changes in two of the most popular U.S. indexes. The growth of transparent custom index ETFs and the expected introduction of transparent trading in actively managed ETFs will increase investor exposure to trading transparency costs. Fortunately, researchers will be able to quantify the performance penalty from trading transparency.
