New strategies:
#402 – International Volatility Arbitrage
Period of rebalancing: monthly
Markets traded: equities
Instruments used for trading: options
Complexity: Very complex strategy
Bactest period: 2006 – 2015
Indicative performance: 16.38%
Estimated volatility: 8.93%
Source paper:
Tosi, Adriano: International Volatility Arbitrage
https://ssrn.com/abstract=3203445
Abstract:
Are options on exchange-traded products (ETPs) and indexes consistently priced internationally? The cross-section of international option returns exhibits a mispricing by sorting on ex-ante volatility returns. In addition, selling international ETP options and buying their corresponding index options commands a positive risk premium. Both empirical findings are economically large and pervasive internationally, whereas they are comparably small domestically. While volatility hedge funds are exposed towards domestic option products, they neglect the possibility of engaging in foreign volatility arbitrage. These findings entail that alpha seekers may expand their horizon towards international derivatives which at first glance are similar, but institutionally are not.
#403 – Cross-Sectional Seasonalities in International Government Bond Returns
Period of rebalancing: monthly
Markets traded: bonds
Instruments used for trading: futures
Complexity: Moderately complex strategy
Bactest period: 1980-2018
Indicative performance: 7.70%
Estimated volatility: 13.85%
Source paper:
Zaremba, Adam: Cross-Sectional Seasonalities in International Government Bond Returns
https://ssrn.com/abstract=3212995
Abstract:
We are the first to document the cross-sectional return seasonality effect in international government bonds. Using a variety of tests, we examine fixed-income securities from 22 countries for the years 1980–2018. The bonds with high (low) returns in the same-calendar month in the past continue to overperform (underperform) in the future. The effect is robust to many considerations, including controlling for established predictors of bond returns. Our results support the behavioural story of the anomaly, demonstrating its highest profitability in the periods of elevated investor sentiment and in the market segments of strong limits to arbitrage. Nonetheless, investment application of bond seasonality might be challenging due to high trading costs and the required short holding periods.
New research papers related to existing strategies:
#14 – Momentum Effect in Stocks
Souza: A Critique of Momentum Anomalies
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3228116
Abstract
This paper argues that momentum regularities in asset prices are not anomalies. They appear because assets have persistent risk exposures. A general, frictionless, risk-based asset pricing framework with rational expectations and a stationary but stochastic price of risk process theoretically explains why momentum returns (i) are positive, (ii) negatively skewed, (iii) have negative CAPM betas, (iv) positive CAPM alphas, and (v) "crash" infrequently and predictably in market rebounds. The paper offers further empirical evidence, based on different price of risk proxies, supporting the framework presented and illustrates the explanation with Monte Carlo simulations.
#378 – Time-Series Momentum Factor in Cryptocurrencies
Liu, Tsyvinski: Risks and Returns of Cryptocurrency
https://economics.yale.edu/sites/default/files/files/Faculty/Tsyvinski/cryptoreturns%208-7-2018.pdf
Abstract:
We establish that the risk-return tradeoff of cryptocurrencies (Bitcoin, Ripple, and Ethereum) is distinct from those of stocks, currencies, and precious metals. Cryptocurrencies have no exposure to most common stock market and macroeconomic factors. They also have no exposure to the returns of currencies and commodities. In contrast, we show that the cryptocurrency returns can be predicted by factors which are specific to cryptocurrency markets. Specifically, we determine that there is a strong time-series momentum effect and that proxies for investor attention strongly forecast cryptocurrency returns. Finally, we create an index of exposures to cryptocurrencies of 354 industries in the US and 137 industries in China.
Yang: Behavioral Anomalies in Cryptocurrency Markets
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3174421
Abstract:
If behavioral biases explain asset pricing anomalies, they should also materialize in cryptocurrency markets. I test more than 20 stock return anomalies based on daily cryptocurrency data, and document strong evidence of price momentum. Unlike stock markets, price reversal and risk-based anomalies are weak, controlling for market and size. Cryptocurrency anomalies can be explained by behavioral theories that place more emphasis on the role of speculators than fundamental traders.
And two additional related research papers have been included into existing free strategy reviews during last 2 weeks:
#77 – Beta Factor in Stocks
Hwang, Rubesam, Salmon: Overconfidence, Sentiment and Beta Herding: A Behavioral Explanation of the Low-Beta Anomaly
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3224321
Abstract:
We investigate asset returns using the concept of beta herding, which measures cross-sectional variations in betas induced by investors whose beliefs about the market are biased due to changes in confidence or sentiment. Overconfidence or optimistic sentiment causes beta herding (compression of individual assets’ betas towards the market beta), while under-confidence or pessimistic sentiment leads to adverse beta herding (dispersion of betas away from the market beta). We find that beta herding is related to the low-beta anomaly, as high beta stocks underperform low beta stocks on a risk-adjusted basis exclusively following periods of adverse beta herding. As an explanation of the low-beta anomaly, we propose the persistence of bias in betas (i.e., a large difference in betas) that lasts for more than one year as market uncertainty continues.
And a new financial research paper related to multiple equity factor strategies:
Atilgan, Demirtas, Gunaydin: The Cross-Section of Equity Returns in Emerging Markets
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3225034
Abstract:
This study investigates the relation between a comprehensive set of firm-specific attributes and future equity returns for a sample of stocks from 27 emerging markets. Univariate analyses based on equal-weighted portfolio returns reveal that the low beta, firm size, book-to-market ratio, momentum and illiquidity anomalies are also observed in emerging markets whereas short-term reversal, left-tail risk and lottery demand effects manifest themselves in the opposite direction compared to U.S. studies. Value-weighted portfolio returns and bivariate analyses that control for firm size show that some of these results are driven by small stocks. After we control for all attributes simultaneously in a regression framework, we find that the most robust cross-sectional effects for emerging market equities are medium and short-term return momentum.
