New strategies:
#253 – Momentum in Futures
Period of rebalancing: 6 months
Markets traded: equities, bonds, currencies
Instruments used for trading: futures, CFDs
Complexity: Simple strategy
Bactest period: 1991 – 2007
Indicative performance: 6.49%
Estimated volatility: 12.91%
Source paper:
Ayora, Torro: The Financial Futures Momentum
http://www.academia.edu/2733153/Trading_in_Risk_Dimensions
Pages 67 – 79
Abstract:
The momentum strategy is the most famous anomaly arguing against thehypothesis ofï¬nancial market efï¬ciency. In this chapter, the momentumstrategy produces a signiï¬cant abnormal return for holding periods ofsixmonths and one year using ï¬nancial futures (stock indexes, currencies, andï¬xed income). Furthermore, this study characterizes those futures con-tracts that contribute to the momentum strategy return. When the sampleis split in two groups, depending on the level ofvolatility, a signiï¬cantly higher return is obtained in the high volatility group. Moreover, when thesample offutures is split in four groups, depending on the trading volumeand open interest levels, those contracts with high trading volume and low open interest report the best momentum performance.
New research papers related to existing strategies:
#13 – Short Term Reversal in Stocks
De Groot, Huij, Zhou: Another Look at Trading Costs and Short-Term Reversal Profits
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1605049
Abstract:
Several studies report that abnormal returns associated with short-term reversal investment strategies diminish once transaction costs are taken into account. We show that the impact of transaction costs on the strategies’ profitability can largely be attributed to excessively trading in small cap stocks. Limiting the stock universe to large cap stocks significantly reduces trading costs. Applying a more sophisticated portfolio construction algorithm to lower turnover reduces trading costs even further. Our finding that reversal strategies generate 30 to 50 basis points per week net of transaction costs poses a serious challenge to standard rational asset pricing models. Our findings also have important implications for the understanding and practical implementation of reversal strategies.
#14 – Momentum Effect in Stocks
#162 – Momentum Effect in Stocks in Small Portfolios
Foltice, Langer: Profitable Momentum Trading Strategies for Individual Investors
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2420743
Abstract:
For nearly three decades, scientific studies have explored momentum investing strategies and observed stable excess returns in various financial markets. However, the trading strategies typically analyzed in such research are not accessible to individual investors due to short selling constraints, nor are they profitable due to high trading costs. Incorporating these constraints, we suggest and explore a simplified momentum trading strategy that only exploits excess returns from topside momentum for a small number of individual stocks. Building on US data from the New York Stock Exchange from 1991-2010, we analyze whether such a simplified momentum strategy outperforms the benchmark after factoring in realistic transaction costs and risks. We find that it is indeed possible for individual investors with initial investment amounts of at least $5,000. In further attempts to improve this practical trading strategy we also analyze an overlapping momentum trading strategy consisting of a more frequent trading of a smaller number of “winner” stocks. We find that increasing the trading frequency initially increases the risk-adjusted returns of these portfolios up to an optimal point when excessive transaction costs begin to dominate the scene. In a calibration study, we find that, depending on the initial investment amount of the portfolio, the optimal momentum trading frequency ranges from bi-yearly to monthly.
#155 – Momentum Combined with Volatility Effect in Stocks
#156 – Reversal Combined with Volatility Effect in Stocks
Wei, Yang: Short-Term Momentum and Reversals in Large Stocks
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2029984
Abstract:
Using stocks traded on the NYSE, AMEX and NASDAQ for the period of 1964 to 2009, this study demonstrates that, while momentum prevails among small stocks, momentum and reversals coexist among large stocks for a holding period of up to six months. The momentum/reversal divide is along the volatility dimension: Large-cap/low-volatility stocks exhibit reversals while large-cap/high-volatility stocks experience momentum. Our finding is in sharp contrast with those in the existing literature which mostly documents and explains momentum and reversals for different horizons. As such, our study not only offers fresh, new empirical findings on cross-section return predictability but also poses a challenge to the existing theoretical paradigms that are tailored to sequential occurrence of momentum and reversals. Specifically, we contribute to the literature by 1) uncovering a new empirical regularity which explains why large stocks are generally associated with no or weak momentum in the short-term, and 2) advancing a theoretical model based on "moderated confidence" which can rationalize empirical findings such as the one in the current paper where underreaction and overreaction can occur simultaneously with the same investor.
