New strategies:
#228 – Google Search Volume Combined with Extent of Press News Predicts Stocks' Returns
Period of rebalancing: Monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Very complex strategy
Bactest period: 2005 – 2011
Indicative performance: 20.41%
Estimated volatility: 5.87%
Source paper:
Wang: Media and Google: The Impact of Information Supply and Demand on Stock Returns
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2180409
Abstract:
This paper is the first to examine the joint effect of information supply and demand on stock returns. Unlike previous studies, I examine the relationship between cross-sectional stock returns and "pairs" of information supply and demand shifts. The number of news articles and Google search volume (for a company) are used as proxies for information supply and demand respectively. I show that only an upward shift in both information supply and demand is an economically and statistically significant predictor of future returns among shift pairs. A monthly rebalanced portfolio of buying stocks with this shift “pair” and short selling the other stocks generates an abnormal return between 16% and 22% per year, with the Sharpe ratio between 0.85 and 0.9 (compared with a Sharpe ratio of 0.049 for the S&P500 during the same period). The abnormal return increases to between 23% and 34% per year in a subsample of small stocks. These findings imply that the supply of information affects stock returns conditional on the demand for information. The result is consistent with the hypothesis that investor attention boosts stock prices. It also affirms the importance of incorporating both information supply and demand in the analysis.
#229 – Earnings Quality Factor
Period of rebalancing: yearly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1988-2012
Indicative performance: 7.95%
Estimated volatility: 5.91%
Source paper:
Kozlov, Petajisto: Global Return Premiums on Earnings Quality, Value, and Size
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2179247
Abstract:
We investigate the return premium on stocks with high earnings quality using a broad and recent global dataset covering all developed markets from 7/1988 to 6/2012. We find that a simple strategy that is long stocks with high earnings quality and short stocks with low earnings quality produces a higher Sharpe ratio than the overall market or similar strategies betting on value or small stocks. This result holds both in the overall sample as well as in the more recent time period since 2005. Because the global earnings quality portfolio has a negative correlation with a value portfolio, an investor wishing to invest in both exposures can achieve significant diversification benefits.
New research paper related to existing strategy:
#11 – Stock Return Reversal within Industries
Hameed, Mian: Industries and Stock Return Reversals
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2181655
Abstract:
This paper documents pervasive evidence of intra-industry reversals in monthly returns. Unlike the conventional reversal strategy based on stock returns relative to the market portfolio, we document intra-industry return reversals that are larger in magnitude, consistently present over time, and prevalent across sub-group of stocks, including large and liquid stocks. These return reversals are driven by order imbalances and non-informational shocks. Consistent with reversals representing compensation for supplying liquidity, intra-industry reversals are stronger following aggregate market declines and volatile times, reflecting binding capital constraints and limited risk bearing capacity of liquidity providers.
