New strategies:
#217 – Option/Stock Volume Ratio Predicts Stock Returns
Period of rebalancing: Monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1996 – 2008
Indicative performance: 14.54%
Estimated volatility: 19.20%
Source paper:
Johnson, So: The Option to Stock Volume Ratio and Future Returns
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1624062
Abstract:
We examine the information content of option and equity volumes when trade direction is unobserved. In a multimarket symmetric information model, we show that equity short-sale costs result in a negative relation between relative option volume and future ï¬rm value. In our empirical tests, ï¬rms in the lowest decile of the option to stock volume ratio (O/S) outperform the highest decile by 1.47% per month on a risk-adjusted basis. Our model and empirics both indicate that O/S is a stronger signal when short-sale costs are high or option leverage is low. O/S also predicts future ï¬rm-speciï¬c earnings news, consistent with O/S reflecting private information.
#218 – Change in Option/Stock Volume Ratio Predicts Stock Returns
Period of rebalancing: Monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1996 – 2008
Indicative performance: 14.65%
Estimated volatility: 15.50%
Source paper:
Johnson, So: The Option to Stock Volume Ratio and Future Returns
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1624062
Abstract:
We examine the information content of option and equity volumes when trade direction is unobserved. In a multimarket symmetric information model, we show that equity short-sale costs result in a negative relation between relative option volume and future ï¬rm value. In our empirical tests, ï¬rms in the lowest decile of the option to stock volume ratio (O/S) outperform the highest decile by 1.47% per month on a risk-adjusted basis. Our model and empirics both indicate that O/S is a stronger signal when short-sale costs are high or option leverage is low. O/S also predicts future ï¬rm-speciï¬c earnings news, consistent with O/S reflecting private information.
New research papers related to existing strategies:
#6 – Volatility Effect in Stocks – Long-Short Version
#7 – Volatility Effect in Stocks – Long-Only Version
Dutt, Humphery-Jenner: Stock Return Volatility, Operating Performance and Stock Returns: International Evidence on Drivers of the 'Low Volatility' Anomaly
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2162854
Abstract:
This study highlights the link between stock return volatility, operating performance, and stock returns. Prior studies suggest that there is a ‘low volatility’ anomaly, where firms with a low stock return volatility out-perform firms with a high stock return volatility. This paper confirms that low volatility stocks earn higher returns than high volatility stocks in emerging markets and developed markets outside of North America. We also show that low volatility stocks have higher operating returns and this might explain why low volatility stocks earn higher stock returns. These results provide a partial explanation for the ‘low volatility effect’ that is independent from the existence of market anomalies or per se inefficiencies that might otherwise drive a low volatility effect. We emphasize the importance of controlling for stock return volatility when analyzing operating performance and stock performance.
#12 – Pairs Trading with Stocks
Lucey, Walshe: European Equity Pairs Trading: The Effect of Data Frequency on Risk and Return
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2150217
Abstract:
This article examines an equity pairs trading strategy using daily, weekly and monthly European share price data over the period 1998–2007. The authors shows that when stocks are matched into pairs with minimum distance between normalised historical prices, a simple trading rule based on volatility between these prices yields annualised raw returns of up to 15% for the weekly data frequency. Bootstrap results suggest returns from the strategy are attributable to skill rather than luck, while insignificant beta coefficients provide evidence that this is a market neutral strategy. Resistance of the strategy’s returns to reversal factors suggest pairs trading is fundamentally different to previously documented reversal strategies based on concepts such as mean reversion.
#123 – Options Skewness Predicts Consecutive Stocks Returns
#169 – Exploiting Option Information in the Equity Market
Driessen, Lin, Lu: Why do options prices predict stock returns?
http://www.ccfr.org.cn/cicf2012/papers/20120611085326.pdf
Abstract:
This paper provides a new perspective on the informational leading role of the options market relative to the stock market. We study the extent to which the predictive power of options implied volatilities (IVs) on stock returns lies in earnings-related or/and analyst-related corporate news. We find that our two proxies for options trading (IV skew and IV spread) significantly predict earnings surprises, analyst recommendation changes, and analyst forecast revisions. Next, we find that the IV skew and spread predict stock returns, and that the degree of predictability more than doubles around earnings-related or/and analyst-related events. Additionally, we show that informed traders choose to use the options market particularly because of short-sale constraints on the underlying stock. We also find that the predictability of options IVs increases with the liquidity of the options.
