New strategies:
#395 – Sales Seasonality Premium
Period of rebalancing: monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1970-2016
Indicative performance: 8.73%
Estimated volatility: 12.35%
Source paper:
Grullon, Gustavo; Kaba, Yamil and Nuñez, Alexander: When Low Beats High: Riding the Sales Seasonality Premium
https://ssrn.com/abstract=3174181
Abstract:
We demonstrate that sorting stocks on sales seasonality predicts future abnormal returns. A long-short strategy of buying low-sales-season stocks and shorting high-sales-season stocks generates an annual alpha of 8.4%. Further, this strategy has become stronger over time, generating an annual alpha of approximately 15% over the last decade. This seasonal effect predicts future stock returns in cross-sectional regressions, and is independent of previously documented seasonal anomalies. Moreover, the alphas from this trading strategy cannot be explained by differences in stock market liquidity, systematic risk, asymmetric information, or financing decisions. Further tests indicate that this phenomenon may be driven partially by seasonal fluctuations in the level of investor attention.
#396 – When to Own Stocks and When to Own Gold
Period of rebalancing: monthly
Markets traded: equties, commodities
Instruments used for trading: ETFs, CFDs, futures
Complexity: Simple strategy
Bactest period: 1946-2016
Indicative performance: 10.00%
Estimated volatility: 14.00%
Source paper:
Peterson, Timothy: When to Own Stocks and When to Own Gold
https://ssrn.com/abstract=3177189
Abstract:
We show that dynamic investment portfolio asset allocation based on secular market cycles outperforms a buy-and-hold portfolio of equities and outperforms a buy-and-hold portfolio of gold over long periods. An objective definition of secular market enables identification of an appropriate ex-ante risk-on or risk-off posture for a portfolio. We construct an objective measure which we term a “secular market indicator (SMI)” using a modified Shiller CAPE ratio with gold as a reference point. This SMI has slightly greater predictive power than Shiller’s CAPE Ratio in that it provides a consistent threshold signal for secular macroeconomic reversals. Finally, we use the SMI to create a simple decision rule to shift asset allocation between equity and gold depending on the secular market cycle. The resulting portfolio outperforms an all-equity portfolio and an all-gold portfolio over holding periods of 10 years about 70% of the time, and produces superior risk-adjusted performance about 80% of the time.
#397 – Accruals Momentum
Period of rebalancing: yearly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Very complex strategy
Bactest period: 1980-2016
Indicative performance: 9.94%
Estimated volatility: 11.10%
Source paper:
Hao, Xiaoting and Jang, Juwon and Lee, Eunju: Accruals Momentum
https://ssrn.com/abstract=3188172
Abstract:
In this study, we examine the information content of accruals momentum defined as a string of high or low discretionary accruals for four consecutive years. We find that firms that consistently report high levels of discretionary accruals experience low subsequent returns. The results are robust after we control for annual levels of discretionary accruals for the estimation period of accruals momentum. A long-short portfolio based on accruals momentum generates significantly positive returns for the subsequent periods. Our results also show that the accruals momentum impact is more pronounced for low growth firms, suggesting that the overpricing of stocks with high accruals momentum is driven by managerial discretion to manage earnings. This refutes the possibility that our results are driven by the growth anomaly.
New research papers related to existing strategies:
#128 – Innovative Efficiency Effect in Stocks
#141 – Innovative Efficiency Effect in Stocks ver. 2
Maletic: Profitability, R&D Investments and the Cross-Section of Stock Returns
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3178186
Abstract:
In this paper, after controlling for the level of R&D expenditures, I find that profitability of R&D intensive firms is more important for subsequent returns than the R&D intensity (measured with R&D-to-market value or R&D-to-assets) and past performance. In a sample of firms where I am able to compute abnormal returns around quarterly earnings announcements R&D-to-market value variable becomes insignificant even when not controlling for the firm’s profitability. Since quarterly profits are reported by big firms this suggests that R&D anomaly is driven by small stocks. Big firms with high R&D-to-market value earn lower not higher subsequent returns, once I control for the level of R&D expenditures and firm’s profitability. The previously recorded anomaly, namely that R&D intensive firms earn positive abnormal returns, seems to be driven by the level of R&D investment, its profitability and small stocks.
#285 – Spread (Basis) Momentum within Commodities
#288 – Combining Momentum, Term Structure, and Idiosyncratic Volatility within Commodities
Sakkas, Tessaromatis: Factor Based Commodity Investing
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3178371
Abstract:
A multi-factor commodity portfolio combining the high momentum, low basis and high basis-momentum commodity factor portfolios outperforms significantly, economically and statistically, widely used commodity benchmarks. We find evidence that a variance timing strategy applied to commodity factor portfolios improves the return to risk trade-off of unmanaged commodity portfolios. In contrast, dynamic commodities strategies based on commodity return prediction models provide little value added once variance timing has been applied to commodity portfolios.
And three additional related research papers have been included into existing free strategy reviews during last 2 weeks:
The Impact of Volatility Targeting on Equities, Bonds, Commodities and Currencies
Harvey, Hoyle, Korgaonkar, Rattray, Sargaison, Hemert: The Impact of Volatility Targeting
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3175538
Abstract:
Recent studies show that volatility-managed equity portfolios realize higher Sharpe ratios than portfolios with a constant notional exposure. We show that this result only holds for “risk assets”, such as equity and credit, and link this to the so-called leverage effect for those assets. In contrast, for bonds, currencies, and commodities the impact of volatility targeting on the Sharpe ratio is negligible. However, the impact of volatility targeting goes beyond the Sharpe ratio: it reduces the likelihood of extreme returns, across all asset classes. Particularly relevant for investors, “left-tail” events tend to be less severe, as they typically occur at times of elevated volatility, when a target-volatility portfolio has a relatively small notional exposure. We also consider the popular 60-40 equity-bond “balanced” portfolio and an equity-bond-credit-commodity “risk parity” portfolio. Volatility scaling at both the asset and portfolio level improves Sharpe ratios and reduces the likelihood of tail events.
Related to cryptocurrency trading:
Makarov, Schoar: Trading and Arbitrage in Cryptocurrency Markets
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3171204
Abstract:
This paper studies the efficiency and price formation of bitcoin and other cryptocurrency markets. First, there are large recurrent arbitrage opportunities in cryptocurrency prices relative to fiat currencies across exchanges that often persist for several days or weeks. These price dispersions exist even in the face of significant trading volumes on many of the exchanges. The total size of arbitrage profits just from December 2017 to February 2018 is above of $1 billion. Second, arbitrage opportunities are much larger across than within the same region; they are particularly large between the US, Japan and Korea, but smaller between the US and Europe. But spreads are much smaller when trading one cryptocurrency against another, suggesting that cross-border controls on fiat currencies play an important role. Finally, we decompose signed volume on each exchange into a common component and an idiosyncratic, exchange-specific one. We show that the common component explains up to 85% of the variation in bitcoin returns and that the idiosyncratic components of order flow play an important role in explaining the size of the arbitrage spreads between exchanges.
Our recommended read to all parties interested in cryptocurrencies …
Griffin, Schams: Is Bitcoin Really Un-Tethered?
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3195066
Abstract:
This paper investigates whether Tether, a digital currency pegged to U.S. dollars, influences Bitcoin and other cryptocurrency prices during the recent boom. Using algorithms to analyze the blockchain data, we find that purchases with Tether are timed following market downturns and result in sizable increases in Bitcoin prices. Less than 1% of hours with such heavy Tether transactions are associated with 50% of the meteoric rise in Bitcoin and 64% of other top cryptocurrencies. The flow clusters below round prices, induces asymmetric auto-correlations in Bitcoin, and suggests incomplete Tether backing before month-ends. These patterns cannot be explained by investor demand proxies but are most consistent with the supply-based hypothesis where Tether is used to provide price support and manipulate cryptocurrency prices.
