New strategies:
#435 – Price Overreactions in the Forex
Period of rebalancing: Intraday
Markets traded: currencies
Instruments used for trading: CFDs, futures, forwards
Complexity: Simple strategy
Bactest period: 2008 – 2018
Indicative performance: 4.78%
Estimated volatility: 6.30%
Source paper:
Caporale, Guglielmo Maria and Plastun, Oleksiy: Price Overreactions in the Forex and Trading Strategies
https://ssrn.com/abstract=3362142
Abstract:
This paper explores price overreactions in the FOREX by using both daily and intraday data on the EURUSD, USDJPY, USDCAD, AUDUSD and EURJPY exchange rates over the period 01.01.2008-31.12.2018. It applies a dynamic trigger approach to detect overreactions and then various statistical methods, including cumulative abnormal returns analysis, to test the following hypotheses: the intraday behaviour of hourly returns on overreaction days is different from that on normal days (H1), there are detectable patterns in intraday price dynamics on overreaction days (H2) and on the following days (H3). The results suggest that there are statistically significant differences between intraday dynamics on overreaction and normal days respectively; also, prices tend to change in the direction of the overreaction during the overreaction day, but move in the opposite direction on the following day. Finally, there exist trading strategies that generate abnormal profits by exploiting the detected anomalies, which can be seen as evidence of market inefficiency.
#436 – A Multi Strategy Approach to Trading Foreign Exchange Futures
Period of rebalancing: Monthly
Markets traded: currencies
Instruments used for trading: CFDs, futures, forwards
Complexity: Very complex strategy
Bactest period: 1995-2019
Indicative performance: 6.58%
Estimated volatility: 13.16%
Source paper:
Srivastava, Sonam and Chakravorty, Gaurav and gupta, sanchit and Awasthi, Ankit: A Multi Strategy Approach to Trading Foreign Exchange Futures
https://ssrn.com/abstract=3322717
Abstract:
In this article we present a systematic multi-strategy approach to trading foreign exchange futures for a managed futures portfolio. Our central finding is that there is more alpha to be derived from combining different indicators compared to hand engineering each indicator. We show that combining technical indicators like momentum and mean reversion with fx carry indicators leads to significant improvement over individual indicators. Through an end to end systematic portfolio construction methodology, including indicator construction, normalization and combination we are able to improve the Sharpe Ratio of the resulting portfolio over the best performing single indicator by 60% when evaluated in an unbiased walk forward backtest.
New research papers related to existing strategies:
#5 – FX Carry Trade
#6 – Bond Carry Strategy
#7 – Low Volatility Factor Effect in Stocks
#8 – Currency Momentum Factor
#9 – Currency Value Factor – PPP Strategy
#14 – Momentum Factor Effect in Stocks
#15 – Momentum Factor Effect in Country Equity Indexes
#21 – Momentum Effect in Commodities
#22 – Term Structure Effect in Commodities
#26 – Value (Book-to-Market) Factor
#28 – Value and Momentum Factors across Asset Classes
#57 – Term Spread Premium
#135 – Volatility Effect in Commodities
#207 – Value Factor Effect within Countries
Ilmanen, Israel, Moskowitz, Thapar, Wang: Factor Premia and Factor Timing: A Century of Evidence
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3400998
Abstract:
We examine four prominent factor premia – value, momentum, carry, and defensive – over a century from six asset classes. First, we verify their existence with a mass of out-of-sample evidence across time and asset markets. We find a 30% drop in estimated premia out of sample, which we show is more likely due to overfitting than informed trading. Second, probing for potential underlying sources of the premia, we find little reliable relation to macroeconomic risks, liquidity, sentiment, or crash risks, despite adding five decades of global economic events. Finally, we find significant time-variation in factor premia that are mildly predictable when imposing theoretical restrictions on timing models. However, significant profitability eludes a host of timing strategies once proper data lags and transactions costs are accounted for. The results offer support for time-varying risk premia models with important implications for theory seeking to explain the sources of factor returns.
#281 – Skewness Effect in Commodities
Han, Mo, Su, Zhu: Idiosyncratic Skewness or Coskewness? Evidence from Commodity Futures Returns
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3391784
Abstract:
We examine the ability of idiosyncratic skewness and coskewness to explain the cross section of commodity returns at the characteristics and factor levels, and find that idiosyncratic skewness is significantly related to the cross section of commodity returns, whereas coskewness is not. Furthermore, we construct a tradeable factor based on idiosyncratic skewness and find that it is significantly priced cross-sectionally in commodity futures. In addition, a new measure of idiosyncratic skewness (IE) proposed by Jiang, Wu, Zhou, and Zhu (2018) is stronger and more robust in capturing the skewness or asymmetry effect at both the characteristics and factor levels.
#378 – Time-Series Momentum Factor in Cryptocurrencies
#383 – Moving Average Strategies for Cryptocurrencies
Hudson, Urquhart: Technical Analysis and Cryptocurrencies
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3387950
Abstract:
This paper carries out a comprehensive examination of technical trading rules in cryptocurrency markets, using data from two Bitcoin markets and three other popular cryptocurrencies. We employ almost 15,000 technical trading rules from the main five classes of technical trading rules and find significant predictability and profitability for each class of technical trading rule in each cryptocurrency. We find that the breakeven transaction costs are substantially higher than those typically found in cryptocurrency markets. To safeguard against data-snooping, we implement a number of multiple hypothesis procedures which confirms our findings that technical trading rules do offer significant predictive power and profitability to investors. We also show that the technical trading rules offer substantially higher risk-adjusted returns than the simple buy-and-hold strategy, showing protection against lengthy and severe drawdowns associated with cryptocurrency markets. However there is no predictability for Bitcoin in the out-of-sample period, although predictability remains in other cryptocurrency markets.
And two additional related research papers have been included into existing free strategy reviews during last 2 weeks:
#118 – Time Series Momentum
Lim, Zohren, Roberts: Enhancing Time Series Momentum Strategies Using Deep Neural Networks
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3369195
Abstract:
While time series momentum is a well-studied phenomenon in finance, common strategies require the explicit definition of both a trend estimator and a position sizing rule. In this paper, we introduce Deep Momentum Networks — a hybrid approach which injects deep learning based trading rules into the volatility scaling framework of time series momentum. The model also simultaneously learns both trend estimation and position sizing in a data-driven manner, with networks directly trained by optimising the Sharpe ratio of the signal. Backtesting on a portfolio of 88 continuous futures contracts, we demonstrate that the Sharpe-optimised LSTM improved traditional methods by more than two times in the absence of transactions costs, and continue outperforming when considering transaction costs up to 2-3 basis points. To account for more illiquid assets, we also propose a turnover regularisation term which trains the network to factor in costs at run-time.
We at Quantpedia are not the only ones who are interested in finding strategies that can be used to mitigate the impacts of the large equity corrections. A new research paper written by Harvey, Hoyle, Rattray, Sargaison, Taylor and Van Hemert explores the same question and analyzes the performance of different tools that investors could deploy during equity bear markets. We sincerely recommend it …
Harvey, Hoyle, Rattray, Sargaison, Taylor, Van Hemert: The Best of Strategies for the Worst of Times: Can Portfolios be Crisis Proofed?
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3383173
Abstract:
In the late stages of long bull markets, a popular question arises: What steps can an investor take to mitigate the impact of the inevitable large equity correction? However, hedging equity portfolios is notoriously difficult and expensive. We analyze the performance of different tools that investors could deploy. For example, continuously holding short-dated S&P 500 put options is the most reliable defensive method but also the most costly strategy. Holding ‘safe-haven’ US Treasury bonds produces a positive carry, but may be an unreliable crisis-hedge strategy, as the post-2000 negative bond-equity correlation is a historical rarity. Long gold and long credit protection portfolios sit in between puts and bonds in terms of both cost and reliability. Dynamic strategies that performed well during past drawdowns include: futures time-series momentum (which benefits from extended equity sell-offs) and a quality strategy that takes long/short positions in the highest/lowest quality company stocks (which benefits from a ‘flight-to-quality’ effect during crises). We examine both large equity drawdowns and recessions. We also provide some out-of-sample evidence of the defensive performance of these strategies relative to an earlier, related paper.
