New strategies:
#138 – Repurchase/New issue Effect
Period of rebalancing: Yearly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Very complex strategy
Bactest period: 1992-2008
Indicative performance: 11.16%
Estimated volatility: 23.90%
Source paper:
Hirshleifer, Jiang: The UMO (Undervalued Minus Overvalued) Factor
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1904042
Abstract:
This document provides an overview of the UMO factor. It describes its motivation, construction, and how to obtain it and use it. Behavioral theories suggest that investor misperceptions and market mispricing will be correlated across firms. The UMO factor uses equity and debt financing to identify common misvaluation across firms. UMO is a zero-investment portfolio that goes long on firms that issue securities and short on firms that repurchase. UMO captures comovement in returns beyond that in standard multifactor models, substantially improves the Sharpe ratio of the tangency portfolio, and carries heavy weight in the tangency portfolio. Loadings on UMO strongly predict the cross-section of returns on both portfolios and individual stocks, even among firms not recently involved in external financing activities, and even after controlling for other standard predictors. UMO was proposed by Hirshleifer and Jiang (2010), who provide further evidence suggesting that UMO loadings proxy for the common component of a stock's misvaluation. For further details, see Hirshleifer, David, and Danling Jiang, "A Financing-Based Misvaluation Factor and the Cross-Section of Expected Returns," Review of Financial Studies (2010), 23(9), 3401-3436.
#139 – Volatility Spread in Puts/Calls Predicts Stock Returns
Period of rebalancing: Weekly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1996-2005
Indicative performance: 29.60%
Estimated volatility: 20.86%
Source paper:
Cremers, Weinbaum: Deviations from Put-Call Parity and Stock Return Predictability
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=968237
Abstract:
Deviations from put-call parity contain information about future returns. Using the difference in implied volatility between pairs of call and put options to measure these deviations we find that stocks with relatively expensive calls outperform stocks with relatively expensive puts by 51 basis points per week. We find both positive abnormal performance in stocks with relatively expensive calls and negative abnormal performance in stocks with relatively expensive puts, a result which cannot be explained by short sales constraints. Using rebate rates from the stock lending market, we confirm directly that our findings are not driven by stocks that are hard to borrow. Options with more leverage generate greater predictability. Controlling for size, deviations from put-call parity are more likely to occur in options with underlying stocks that face more information risk. Deviations from put-call parity also tend to predict returns to a larger extent in firms that face a more asymmetric information environment, and in firms with high residual analyst coverage. We also find that the degree of predictability decreases over the sample period. Our results are consistent with mispricing during the earlier years of the study, with a gradual reduction of the mispricing over time.
New research paper related to existing strategies:
#31 – Market Seasonality Effect in World Equity Indexes
Kamstra, Kramer, Levi, Wermers: Seasonal Asset Allocation: Evidence from Mutual Fund Flows
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1907904
Abstract:
This paper explores U.S. mutual fund flows, finding strong evidence of seasonal reallocation across funds based on fund exposure to risk. We show that substantial money moves from U.S. equity to U.S. money market and government bond mutual funds in the fall, then back to equity funds in the spring, controlling for the influence of past performance, advertising, liquidity needs, capital gains overhang, and year-end influences on fund flows. We find a strong correlation between mutual fund net flows (and within-fund-family exchanges) and the onset of and recovery from seasonal depression, consistent with the hypothesis that investor risk aversion varies with the seasons. Further, we find stronger seasonality in Canadian fund flows (a more northerly location relative to the U.S., where seasonal depression is more severe), and a reverse seasonality in fund flows for Australia (where the seasons are reversed). While prior evidence regarding the influence of seasonal depression on financial markets relies on seasonal patterns in asset returns, we provide the first direct trade-related evidence.
