New strategy:
#390 – Lottery Stocks and the 52-Week High
Period of rebalancing: daily
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1963-2016
Indicative performance: 18.58%
Estimated volatility: 19.25%
Source paper:
Byun, Goh: The Role of Psychological Barriers in Lottery-Related Anomalies
https://ssrn.com/abstract=3144907
Abstract:
Previous studies find that stocks with lottery features are overpriced. We show that anomalies induced by investors’ lottery preferences exist primarily among stocks that are far from their 52-week high prices. The results suggest that if stocks are near their 52-week highs, investors no longer prefer lottery stocks since they consider the 52-week high a psychological barrier or an upper bound for prices. We find that the dependency between lottery-related anomalies and nearness to the 52-week high is pronounced among stocks with low institutional ownership. Alternative explanations, such as limits to arbitrage and capital gains, do not explain our results.
New research paper related to existing strategies:
#123 – Options Skewness Predicts Consecutive Stocks Returns
Borochin, Zhao: Risk Neutral Skewness and Momentum Crashes
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3125124
Abstract:
Stocks with high risk-neutral skewness (RNS) have positive abnormal returns driven by rebounds following poor performance. This performance reversal in past loser stocks also underlies momentum crashes. The RNS anomaly is strongest in periods of post-recession rebounds and high market volatility when momentum crashes occur. Furthermore, the momentum anomaly is strongest (weakest) in stocks with the lowest (highest) RNS, consistent with a positive relationship between RNS and momentum crashes. We generalize our findings to all stocks by constructing an RNS factor-mimicking portfolio SKEW and find that a WML strategy that avoids high SKEW beta stocks has superior performance to the baseline and risk-managed WML strategies. Our results hold after controlling for trading frictions, firm characteristics, and risk factors.
Two additional related research papers have been included into existing free strategy reviews during last 2 weeks:
#31 – Market Seasonality Effect in World Equity Indexes
#41 – Turn of the Month in Equity Indexes
#75 – Federal Open Market Committee Meeting Effect in Stocks
Hull, Bakosova, Kment: Seasonal Effects and Other Anomalies
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3165669
Abstract:
We revisit a series of popular anomalies: seasonal, announcement and momentum. We comment on statistical significance and persistence of these effects and propose useful investment strategies to incorporate this information. We investigate the creation of a seasonal anomaly and trend model composed of the Sell in May (SIM), Turn of the Month (TOM), Federal Open Market Committee pre-announcement drift (FOMC) and State Dependent Momentum (SDM). Using the total return S&P 500 dataset starting in 1975, we estimate the parameters of each model on a yearly basis based on an expanding window, and then proceed to form, in a walk forward manner, an optimized combination of the four models using a return to risk optimization procedure. We find that an optimized strategy of the aforementioned four market anomalies produced 9.56% annualized returns with 6.28% volatility and a Sharpe ratio of 0.77. This strategy exceeds that Sharpe ratio of Buy-and-Hold in the same period by almost 100%. Furthermore, the strategy also adds value to the previously published market-timing models of Hull and Qiao (2017) and Hull, Qiao, and Bakosova (2017). A simple strategy which combines all three models more than doubles the Sharpe ratio of Buy-and-Hold between 2003-2017. The combined strategy produces a Sharpe ratio of 1.26, with annualized returns of 18.03% and 13.26% volatility. We publish conclusions from our seasonal trend and anomaly model in our Daily Report.
And a nice peak into the hedge funds industry kitchen. At the end, it is an additional evidence that a lot of hedge funds are trend-followers. And the main reason is that they are more successful because of it :
Liang, Zhang: Do Hedge Funds Ride Market Irrationality?
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3018483
Abstract:
We document significant evidence that hedge funds temporarily ride rather than attack high market irrationality but neither ride irrationality in the long run nor ride low irrationality. Hedge funds actively ride market irrationality during the formation period of the tech bubble in 2000 but not during the formation period of the housing bubble in 2007. Irrationality-riding funds outperform irrationality-attacking funds by 4.4% per year on a risk-adjusted basis. This outperformance is attributed to irrationality-riding during high irrationality periods-the formation period of the tech-bubble, and the bursting period of the housing bubble. The adoption of irrationality riding strategy is related to manager skill as well as investment styles. Our results are consistent with the behavioral theories that sophisticated investors ride rather than attack unsophisticated investors’ strong misperception. Finally, we do not find that mutual fund managers have the irrationality riding ability.
