New strategies:
#140 – Ramadan Effect
Period of rebalancing: Monthly
Markets traded: equities
Instruments used for trading: ETFs, funds
Complexity: Simple strategy
Bactest period: 1989-2007
Indicative performance: 6.70%
Estimated volatility: not stated
Source paper:
Bialkowski, Etebari, Wisniewski: Piety and Profits: Stock Market Anomaly during the Muslim Holy Month
http://www.econ.canterbury.ac.nz/RePEc/cbt/econwp/1052.pdf
Abstract:
Observed by more than 1.5 billion Muslims, Ramadan is one of the most celebrated religious rituals in the world. We investigate stock returns during Ramadan for 14 predominantly Muslim countries over the years 1989-2007. The results show that stock returns during Ramadan are almost nine times higher and less volatile than during the rest of the year. No discernible difference in trading volume is recorded. We find these results consistent with a notion that Ramadan positively affects investor psychology, as it promotes feelings of solidarity and social identity among Muslims world-wide, leading to optimistic beliefs that extend to investment decisions.
#141 – Innovative Efficiency Effect in Stocks ver. 2
Period of rebalancing: Yearly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1980-2009
Indicative performance: 10.0%
Estimated volatility: 18.30%
Source paper:
Cohen, Diether, Malloy: Misvaluing Innovation
http://www.people.hbs.edu/lcohen/pdffiles/dimalco.pdf
Abstract:
We demonstrate that a firm’s ability to innovate is predictable, persistent, and relatively simple to compute, and yet the stock market ignores the implications of past successes when valuing future innovation. We show that two firms that invest the exact same in research and development (R&D) can have quite divergent, but predictably divergent, future paths. Our approach is based on the simple premise that while future outcomes associated with R&D investment are uncertain, the past track records of firms may give insight into their potential for future success. We show that a long-short portfolio strategy that takes advantage of the information in past track records earns abnormal returns of roughly 11 percent per year. Importantly, these past track records also predict divergent future real outcomes in patents, patent citations, and new product innovations.
New research paper related to existing strategies:
#106 – Post-Guidance Drift
Das, Kim, Patro: On the Anomalous Stock Price Response to Management Earnings Forecasts
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1965692
Abstract:
This paper examines stock price formation subsequent to management forecasts of quarterly earnings. In the post-announcement period, we find a significant upward price drift for both good news forecasts and bad news forecasts. The asymmetry in the initial market response and the subsequent upward drift in stock prices are consistent with a reversal of an initial overreaction to managers’ bad news forecasts and a continuation of an initial underreaction to managers’ good news forecasts. This interpretation is supported by a negative (positive) relationship between the initial market response and the post-guidance drift in the bad news (good news) group. The drift pattern is robust to issues arising from measurement. Trading strategies exploiting the post-announcement drift suggest the existence of economically significant trading profits, net of estimated trading costs.
