New strategies:
#320 – Natural Gas Futures Trading Based on Informed Traders Forecasts
Period of rebalancing: intraday
Markets traded: commodities
Instruments used for trading: futures
Complexity: Simple strategy
Bactest period: 2008-2016
Indicative performance: 8.40%
Estimated volatility: 10.00%
Source paper:
Gu, Kurov: What Drives Informed Trading Before Public Releases? Evidence from Natural Gas Inventory Announcements
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2826684
Abstract:
This paper shows evidence of informed trading in the natural gas futures market before gas inventory announcements. We examine whether traders can predict the upcoming announcement by processing public information. The results show that the difference between the median forecast of analysts with high historical forecasting accuracy and the consensus forecast can be used to predict inventory surprises. This predictor explains some of the pre-announcement price drift, suggesting that informed trading before the announcement is likely to be driven by superior forecasting rather than by information leakage. A simple trading strategy conditioned on the predictor would have generated an annualized Sharpe ratio of 1.26.
#321 – International Carry Investing on the Yield Curve
Period of rebalancing: monthly
Markets traded: bonds
Instruments used for trading: futures, forwards, swaps
Complexity: Complex strategy
Bactest period: 1985-2014
Indicative performance: 5.91%
Estimated volatility: not states
Source paper:
Beekhuizen, Duyvesteyn, Martens, Zomerdijk: Carry Investing on the Yield Curve
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2808327
Abstract:
We investigate two yield curve strategies: Curve carry selects bond maturities based on carry and betting-against-beta always selects the shortest maturities. We investigate these strategies for international bond markets. We find that the global curve carry factor has strong performance that cannot be explained by other factors. For betting-against-beta, however, this depends on the assumed funding rate. We also show that the betting-against-beta strategy has no added value for an investor that already invests in curve carry.
New research papers related to existing strategies:
#67 – Riding Industry Bubbles
Milunovich, Shi, Tan: Bubble Detection and Sector Trading in Real Time
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2827051
Abstract:
We conduct a pseudo real-time analysis of the existence and severity of speculative bubbles in eleven US sectors over the period 1973-2015. Based on the real-time bubble signals, a trading strategy is constructed which switches funds between the market index and those industry sectors that exhibit bubble dynamics. Our strategy generates highest after-transaction-cost return and Sharpe ratio, and first-order stochastically dominates three other investments (including two alternative active strategies as well as the buy-and-hold investment in the market index). Subsample analysis and specification checks confirm the robustness of the reported findings.
#73 – Pairs Trading with Commodities
Yang, Goncu, Pantelous: Pairs Trading with Commodity Futures: Evidence from the Chinese Market
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2827637
Abstract:
In this study, the profitability of different pairs selection and spread trading methods are compared using the complete dataset of commodity futures from Dalian Commodity Exchange (DCE), Shanghai Futures Exchange (SHFE) and Zhengzhou Commodity Exchange (CZCE). Pairs trading methods that are already known in the literature are compared in terms of the risk-adjusted returns via in-sample and out-of-sample backtesting and bootstrapping for robustness. The empirical results show that pairs trading in the Chinese commodity futures market offers high returns, whereas, the profitability of these strategies primarily depends on the identification of suitable pairs. The observed high returns are a compensation for the spread divergence risk during the potentially longer holding periods, which implies that the maximum drawdown is more crucial compared to other risk-adjusted return measures such as the Sharpe ratio. Complementary to the existing literature, for our market, it is shown that if shorter maximum holding periods are introduced for the spread positions, then the pairs trading profits decrease. Therefore, the returns do not necessarily imply market inefficiency when the higher maximum drawdown associated with the holding period of the spread position is taken into account.
Two additional related research papers have been included into existing free strategy reviews during last 2 week:
#6 – Volatility Effect in Stocks – Long-Short Version
Driessen, Kuiper, Beilo: Does Interest Rate Exposure Explain the Low Volatility Anomaly?
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2831157
Abstract:
We show that part of the outperformance of low volatility stocks can be explained by a premium for interest rate exposure. Low volatile portfolios have a positive exposure to interest rates, whereas the more volatile stocks have a negative exposure. Incorporating an interest rate premium explains part of the anomaly. Depending on the methodology chosen the reduction of unexplained excess return is between 20% and 80%. Our results provide evidence that interest rate risk is priced differently in the bond and equity market. Our results imply a strong implicit exposure of low volatility portfolios to bonds.
We at Quantpedia consider ourselves a history freaks as we love books and papers related to a history of finance. The work of Dotsis is a perfect example of an interesting paper about a history of option pricing and shows how people were remarkably skilled in assessing price of options even without current high performance IT tools. Academic paper could be related to #20 – Volatiity Risk Premium Effect …
Ghoddusi: Option Pricing Methods in the Late 19th Century
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2831362
Abstract:
This paper examines option pricing methods used by investors in the late 19th century. Based on the book called “PUT-AND-CALL” written by Leonard R. Higgins in 1896 and published in 1906 it is shown that investors in that period used routinely the put-call parity for option conversion and static replication of option positions, and had developed no-arbitrage pricing formulas for determining the prices of at-the-money and slightly out-of-the-money and in-the-money short-term calls and puts. Option traders in the late 19th century understood that the expected return of the underlying does not affect the price of an option and viewed options mainly as instruments to trade volatility.
