New strategies:
#123 – Options Skewness Predicts Consecutive Stocks Returns
Period of rebalancing: Weekly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1996-2005
Indicative performance: 9.19%
Estimated volatility: 11.40%
Source paper:
Zhang, Zhao, Xing: What Does Individual Option Volatility Smirk Tell Us About Future Equity Returns?
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1107464
Abstract:
The shape of the volatility smirk has significant cross-sectional predictive power for future equity returns. Stocks exhibiting the steepest smirks in their traded options underperform stocks with the least pronounced volatility smirks in their options by around 10.9% per year on a risk-adjusted basis. This predictability persists for at least six months, and firms with the steepest volatility smirks are those experiencing the worst earnings shocks in the following quarter. The results are consistent with the notion that informed traders with negative news prefer to trade out-of-the-money put options, and that the equity market is slow in incorporating the information embedded in volatility smirks.
#124 – Industry Momentum Combined with Reversal
Period of rebalancing: Monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1931-2010
Indicative performance: 50.90%
Estimated volatility: 42.16%
Source paper:
Simpson, Giudici, Emery: One-Month Individual Stock Return Reversals and Industry Return Momentum
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1914629
Abstract:
There is a large stream of literature that documents one-month return reversal patterns for individual stocks. Some studies term this reversal pattern overreaction, while others simply skip one-month returns in order to examine longer term momentum patterns in stocks. At the same time, the literature documents that momentum patterns in stock returns tend to be related to momentum patterns in returns to industry portfolios. Further, industry portfolios tend to exhibit return momentum, even at one-month horizons. This paper examines the relationship between individual stock return reversals and industry momentum. We find that individual stock return reversals tend to be related to return reversions within industries. Thus, the predictions of the overreaction hypothesis do not hold, market-wide, but rather within industries. This leads to a dramatically different trading strategy than those suggested by either the overreaction hypothesis or by industry momentum. That is, a strategy that buys the losers within the previous month’s winning industry and shorts the winners in the previous month’s losing industry significantly outperforms an overreaction-based strategy that simply buys losers and shorts winners in the market overall, and it outperforms a industry-momentum-based strategy that simply buys the previous month’s winning industry portfolio and shorts the previous month’s losing industry portfolio.
New research papers related to existing strategies:
#26 – Value (Book-to-Market) Anomaly
New related paper:
Chaves, Hsu, Kalesnik, Shim: Cheaper then Value
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1940504
Abstract:
Value strategies appear to provide an extra source of return. Academic literature provides two competing theories on what drives the value premium: exposure to risk factors or mispricing of the securities. Existing empirical studies have not conclusively rejected one in support of the other. Using Fama and MacBeth (1973) regressions and extensions of the portfolio tests based on Daniel and Titman (1997), we provide evidence that the book-to-market characteristic largely subsumes the loading on the value factor (HML) as a variable that explains the cross-section of stock returns. We improve the power of these tests by using daily data for estimating factor loadings and by using data from 23 developed countries going back more than 30 years. Given these results, we conclude mispricing is likely a more significant portion of the value premium. There appears to be a free lunch after all.
#119 – Google Search Effect
New related paper:
Bordino, Battiston, Caldarelli, Cristelli, Ukkonen, Weber: Web search queries can predict stock market volumes.
http://arxiv.org/PS_cache/arxiv/pdf/1110/1110.4784v1.pdf
Abstract:
We live in a computerized and networked society where many of our actions leave a digital trace and affect other people’s actions. This has lead to the emergence of a new data-driven research field: mathematical methods of computer science, statistical physics and sociometry provide insights on a wide range of disciplines ranging from social science to human mobility. A recent important discovery is that query volumes (i.e., the number of requests submitted by users to search engines on the www) can be used to track and, in some cases, to anticipate the dynamics of social phenomena. Successful exemples include unemployment levels, car and home sales, and epidemics spreading. Few recent works applied this approach to stock prices and market sentiment. However, it remains unclear if trends in financial markets can be anticipated by the collective wisdom of on-line users on the web. Here we show that trading volumes of stocks traded in NASDAQ-100 are correlated with the volumes of queries related to the same stocks. In particular, query volumes anticipate in many cases peaks of trading by one day or more. Our analysis is carried out on a unique dataset of queries, submitted to an important web search engine, which enable us to investigate also the user behavior. We show that the query volume dynamics emerges from the collective but seemingly uncoordinated activity of many users. These findings contribute to the debate on the identification of early warnings of financial systemic risk, based on the activity of users of the www.
