New strategies:
#163 – Net Emotional Volatility Index Effect
Period of rebalancing: Daily
Markets traded: equities
Instruments used for trading: ETFs, funds, futures, CFDs
Complexity: Complex strategy
Bactest period: 2005-2007
Indicative performance: 12.65%
Estimated volatility: 5.92%
Source paper:
Cacia, Tzvetkov: Volatility Based Sentiment Indicators for Timing the Markets
http://lup.lub.lu.se/luur/download?func=downloadFile&recordOId=1335113&fileOId=1646658
Abstract:
VIX, published by the Chicago Board Options Exchange, is a well known implied volatility estimator. In this paper we assess its capability to be used as a sentiment indicator, and to give signals for a short term investment strategy. It will be proved and discussed how VIX-based strategies – also known as “Contrarian” strategies – can be effective as they lead to higher returns than the market. We also propose a purer sentiment indicator derived from VIX that gives more accurate market timing signals. We call this indicator “Net Emotional Volatility Index” (NEVI). It proves to have interesting properties, a highly significant statistical relationship with the market return, and a considerable power to time the market. The results of our back-testing for the period 2001-2002 and 2006-2007 using the two indicators are presented, compared and discussed. Possible explanations of the information that NEVI brings and why its signals work are provided.
New research papers related to existing strategies:
#1 – Asset Class Trend Following
Collie, Sylvanus, Thomas: Volatility-responsive asset allocation
http://www.russell.com/Institutional/research_commentary/PDF/Volatility_responsive_asset_allocation_.pdf
Abstract:
Market volatility is itself volatile; markets can be relatively stable at some points in time and explosively volatile at others. This means that the risk associated with a traditional (fixed-weight) strategic asset allocation policy can be highly variable over time. This paper explores the possibility of volatility-responsive asset allocation—a dynamic asset allocation policy that varies as market volatility changes. Learn why we believe a volatility-responsive asset allocation policy can lead to a more consistent outcome and a better trade-off between risk and return.
#31 – Market Seasonality Effect in World Equity Indexes
Hong, Yu: Gone Fishin': Seasonality in Trading Activity and Asset Prices
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1949419
Abstract:
We use seasonality in stock trading activity associated with summer vacation as a source of exogenous variation to study the relationship between trading volume and expected return. Using data from 51 stock markets, we first confirm a widely held belief that stock turnover is significantly lower during the summer because market participants are on vacation. Interestingly, we find that mean stock return is also lower during the summer for countries with significant declines in trading activity. This relationship is not due to time-varying volatility. Moreover, both large and small investors trade less and the price of trading (bid-ask spread) is higher during the summer. These findings suggest that heterogeneous agent models are essential for a complete understanding of asset prices.
