New strategies:
#256 – Shorting Volatility During FOMC Meeting Days
Period of rebalancing: intraday
Markets traded: equities
Instruments used for trading: futures, ETFs
Complexity: Simple strategy
Bactest period: 2004 – 2013
Indicative performance: 10.00%
Estimated volatility: 9.62%
Source paper:
Fernandez-Perez, Frijns, Tourani-Rad: When No News is Good News – The Decrease in Investor Fear after the FOMC Announcement
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2525991
Abstract:
This paper examines the impact of FOMC announcements on the intraday behavior of the VIX and VIX futures. We find that the VIX and the VIX futures start to decline immediately after the FOMC announcement, and this decline persists for about 45 minutes after the announcement. The VIX declines by about 3% on announcement days, whereas the nearest term VIX futures contract declines by about 1.40% around the announcement. We further note that the decline in the VIX and VIX futures is inversely related to the increase in realized volatility around the FOMC announcement. We show that on days with an FOMC announcement, a trading strategy, going short on the VIX futures at the start of the day and closing the position at the end of the same day, yields a return of about 10% p.a.
New research papers related to existing strategies:
#12 – Pairs Trading with Stocks
Jacobs, Weber: On the Determinants of Pairs Trading Profitability
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2545440
Abstract:
We perform a large-scale empirical analysis of pairs trading, a popular relative-value arbitrage approach. We start with a cross-country study of 34 international stock markets and uncover that abnormal returns are a persistent phenomenon. We then construct a comprehensive U.S. data set to explore the sources behind the puzzling profitability in more depth. Our findings indicate that the type of news leading to pair divergence, the dynamics of investor attention as well as the dynamics of limits to arbitrage are important drivers of the strategy's time-varying performance.
#38 – Accrual Anomaly
#127 – Accrual Anomaly ver.2
Bender, Nielsen: Earnings Quality Revisited
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2543996
Abstract:
Earnings quality as an investment signal has been popular among equity portfolio managers for the last decade. The basic idea behind this “accruals anomaly” is that stocks with high and increasing accruals tend to have low earnings quality while stocks with low and decreasing accruals tend to have high earnings quality. The earnings quality signal stopped working in the mid-2000s but since the end of 2008 has staged a remarkable rebound. Here we evaluate whether earnings quality is a true alpha signal, whether it is a risk factor, or both. We find that in the periods where the signal worked, the strategy was largely driven by stock selection, suggesting earnings quality is indeed an alpha signal. Second, we find that earnings quality is not a good risk factor, in that it does not have high statistical significance when regressed cross-sectionally on returns along with other well-known risk factors and is not very volatile over time. Overall our results indicate that earnings quality may have really been that rare example of a “pure alpha” factor.
#198 – Exploiting Term Structure of VIX Futures
Johnson: Risk Premia and the VIX Term Structure
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2548050
Abstract:
The shape of the VIX term structure conveys information about variance risk premia rather than expected changes in the VIX, a rejection of the expectations hypothesis. Remarkably, a single principal component, Slope, summarizes all this information, predicting the excess returns of S&P 500 variance swaps, VIX futures, and S&P 500 straddles for all maturities and to the exclusion of the rest of the term structure. Slope's predictability is incremental to other proxies for the conditional variance risk premia, is economically significant, and can only partially be explained by observable risk measures.
#256 – Shorting Volatility During FOMC Meeting Days
Donninger: Trading the Patience of Mrs. Yellen. A Short Vix-Futures Strategy for FOMC Announcement Days.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2544445
Abstract:
There is consensus in the literature that the 8 scheduled FOMC meetings are the most important regular trading news. In “When No News is Good News – The decrease in Investor Fear after FOMC announcements” the authors show that the VIX and VIX-Futures decrease significantly after the announcements of the meeting. This paper confirms these findings. It omits the usual academic fuss and concentrates instead on the mundane questions of a detailed trading strategy.
