New strategies:
#419 – Payday Anomaly
Period of rebalancing: Daily
Markets traded: equities
Instruments used for trading: ETFs, futures, CFDs
Complexity: Simple strategy
Bactest period: 1980-2010
Indicative performance: 2.57%
Estimated volatility: 4.31%
Source paper:
Ma, Aixin and Pratt, William Robert: Payday Anomaly
https://ssrn.com/abstract=3257064
Abstract:
Abnormal returns have been found on days near the turn of the calendar months. Previous studies have linked the phenomenon to month-end paychecks, of which a sizable proportion goes into employees’ retirement accounts and is then automatically invested in the market. Since many institutions adopt a semi-monthly pay schedule, we test the hypothesis that the market should exhibit detectable mid-month abnormal movement. Our results indicate that the 16th day of the month statistically and economically outperforms all other calendar days except the 1st and 2nd. As more and more institutions transition into bi-weekly pay schedule, however, the mid-month payday anomaly becomes less prominent.
#420 – Geographical Country Momentum
Period of rebalancing: Monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Very complex strategy
Bactest period: 1990-2014
Indicative performance: 12.69%
Estimated volatility: 19.83%
Source paper:
Bae, Joon Woo, Gravity in International Equity Markets:
https://ssrn.com/abstract=3312433
Abstract:
The size of economies and geographical distance are significant determinants of the contemporaneous and cross-serial correlations in international equity market returns across countries. Larger countries lead returns of small-countries, and this cross-country predictability decreases with geographical distance of the two countries. A long-short trading strategy that exploits this relation yields risk-adjusted returns of 10% per annum. The lead-lag relation is not driven by cross-country differences in the average size or liquidity of rms, the degree of stock market development, or the industry composition. Decomposing stock market returns into cash-flow and discount rate news shows that the international transmission of discount-rate news is more pronounced than cash-flow news and that the size of economies and geographical distance are signi cant determinants for both components of returns.
New research papers related to existing strategies:
#155 – Momentum and Reversal Combined with Volatility Effect in Stocks
Chiang, Kirbz, Nie: Nonlinearity, Return Reversals, Information Flow, and the Idiosyncratic Volatility Puzzle?
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1679464
Abstract:
Stock returns display a robust cross-sectional relation with prior idiosyncratic volatility (IVOL). However, the relation is both nonlinear and non-monotonic. Because the relation is concave in nature, it is consistent with a positive price of volatility risk combined with a behavioral preference for high-volatility stocks on the part of some investors. The effect of prior IVOL is also heavily influenced by prior stock returns. It is negative for stocks that are big losers and positive for stocks that are big winners. Replacing IVOL with dollar trading volume produces similar findings. The strong similarities between the results for IVOL and those for trading volume suggests that IVOL acts as a proxy for the arrival rate of information that spurs speculative trading, and that the likelihood of return reversals falls as the relative importance of speculative trading increases.
#304 – Seasonality in Treasury Auctions Strategy
Smales: The Effect of Treasury Auctions on 10-Year Treasury Note Futures
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3315135
Abstract:
Using 15-minute intervals over the period 2000 – 2017, we show that auctions of U.S. Treasury securities have an economic and statistically significant impact on the 10-year Treasury note futures market. Prices move higher, volatility increases, and there is an upturn in trading volume in the interval immediately following an auction. We find that higher bid-to-cover ratios, and bid-to-cover ratios that exceed the average, lead to positive returns and lower return volatility. This is consistent with bid-to-cover ratios serving as a proxy of demand for the auctioned securities. Primary dealers, who purchase the largest proportion of each issue, have the greatest influence on the market response. This is particularly evident when auction demand increases while they have a short futures position. Together, our results are consistent with traders (particularly primary dealers) buying back short futures hedges immediately following the auction, and suggests that futures are used to hedge at least some inventory risk.
And two additional related research papers have been included into existing free strategy reviews during last 2 weeks:
Related to all trendfollowing strategies:
Dugan, Greyserman: Skew and Trend Aversion
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3315719
Abstract:
Despite evidence of the benefits to portfolio Sharpe ratio and variance, actual investor allocations to Trend Following strategies are typically 5% or less. Why is there such a significant discrepancy between the optimal allocation and actual allocation to Trend? We investigate known behavioral biases as a potential reason. While decision makers have other reasons to exclude Trend Following from their portfolios, in this paper, we explore loss aversion, recency bias, and the ambiguity effect as they pertain to Trend Following, and we call the combination of the three Trend Aversion. We quantify Trend Aversion and show that these biases are a viable explanation for suboptimal allocations to Trend. We demonstrate a direct connection between quantifications of known behavioral biases and current suboptimal allocations to Trend Following. Recognition of these relationships will help highlight the pitfalls of behavioral biases.
There has been the shadow of suspicion that autocratic regimes are slightly manipulating GDP growth numbers. A recent academic paper offers interesting idea how to double check suspicious claims of growth …
Martinez: How Much Should We Trust the Dictator's GDP Growth Estimates?
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3093296
Abstract:
I study the manipulation of GDP growth statistics in non-democracies by comparing the self-reported GDP figures to the nighttime lights recorded by satellites from outer space. I show that the night-lights elasticity of GDP is systematically larger in more authoritarian regimes. This autocracy gradient in the elasticity is not explained by potential differences in a large set of factors, including economic structure and levels of development, across countries with different forms of government. The gradient is larger when countries have a stronger incentive to exaggerate economic performance or when the institutions that constrain the manipulation of official statistics are weaker. I estimate that the most authoritarian regimes inflate yearly GDP growth rates on average by a factor of 1.15-1.3 and show that correcting for data manipulation provides a more nuanced view on the economic success of non-democracies in recent years.
