New strategies:
#243 – Momentum Combined with Insider Trading
Period of rebalancing: monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1989 – 2007
Indicative performance: 15.45%
Estimated volatility: not stated
Source paper:
Ma: Momentum and Insider Trading
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2293221
Abstract:
Both short-term momentum and long-term reversal are attributable to investors underreacting to preceding insider trading information. Past winners (losers) continue to earn significant positive (negative) returns in the short term only if their insider trading activity indicates positive (negative) information. Thus, short-term momentum is attributable to investors underreacting to insider information that confirms past return. In the long term, past winners (losers) earn significant negative (positive) returns only if their insider trading activity indicates negative (positive) information. Thus, long-term reversal is attributable to investors underreacting to insider information that disconfirms past return. After controlling for insider trading information, there is no evidence of overreaction. Further, there is a clear "division of labor" between stocks that contribute to momentum and stocks that contribute to reversal.
New research papers related to existing strategies:
#5 – FX Carry Trade
Huang, MacDonald: Currency Carry Trades, Position-Unwinding Risk, and Sovereign Credit Premia
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2287287
Abstract:
This is the first study that employs option pricing model to measure the position-unwinding risk of currency carry trade portfolios, which well covers the moment information. We show that high interest-rate currencies are exposed to higher position-unwinding risk than low interest-rate currencies. We also investigate the sovereign CDS spreads as the proxy for countries' credit conditions and find that high interest-rate currencies load up positively on sovereign default risk while low interest rate currencies provide a hedge against it. Sovereign credit premia as the dominant economic fundamental risk, together with position-unwinding likelihood indicator as the market risk (nonneutrality) sentiment, captures over 90% cross-sectional variations of carry trade excess returns. We identify sovereign credit risk as the impulsive country-specific risk that drives market volatility, and also its global contagion channels. Then We propose an alternative carry trade strategy immunized from crash risk, and a composite story of sovereign credit premia, global liquidity imbalances and liquidity reversal/spiral for explaining the forward premium puzzle.
#14 – Momentum Effect in Stocks
Liu: Explaining Momentum within an Existing Risk Factor Model
http://web.mit.edu/yichuan/www/JMP_Momentum_Yichuan_Liu.pdf
Abstract:
I propose that abnormal returns generated by price momentum can be explained within the framework of an existing risk factor model such as the Fama-French three- factor model. Two features of a systematic factor, weakly positive autocorrelation and the leverage effect, generate a small positive alpha in the factor portfolio scaled by its own past returns. The momentum portfolio magnifies this alpha by taking long positions in stocks with highly positive (negative) betas and short positions in stocks with highly negative betas given a positive (negative) realized factor return. Time-varying stock betas enhance the degree of magnification significantly. I demonstrate that a simulated market in which asset returns obey the CAPM or the three-factor model can produce realistic momentum dynamics and substantial abnormal profits. In empirical tests, I show that a replicating portfolio with time-varying betas accounts for 50% of the Fama-French alpha of the canonical momentum portfolio and 75% of the value-weighted momentum portfolio. Among firms larger than the NYSE median, the momentum strategy is no longer profitable after taking into account the dynamic replicating portfolio. The residual alpha can be attributed to small firms suffering recent losses and can be completely explained away with the addition of a financial distress factor.
#118 – Time Series Momentum Effect
Maymin, Maymin, Fisher: Momentum's Hidden Sensitivity to the Starting Day
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1899000
Abstract:
We show that the profitability of time-series momentum strategies on commodity futures across their entire history is strongly sensitive to the starting day. Using daily returns with 252-day formation periods and 21-day holding periods, the Sharpe ratio depends on whether one starts on the first day, the second day, and so on, until the twenty first day. This sensitivity is higher for shorter trading periods. The same results also hold in simulation of independent and identically lognormally distributed returns, showing that this is not only an empirical pattern but a fundamental issue with momentum strategies. Portfolio managers should be aware of this latent risk: starting trading the same strategy on the same underlying but one day later could, even after many decades, turn a successful strategy into an unsuccessful one.
