New strategies:
#208 – Share Issuance Effect
Period of rebalancing: Yearly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1990 – 2009
Indicative performance: 10.56%
Estimated volatility: 12.25%
Source paper:
Lancaster, Bornholt: Share Issuance Effects in the Cross-Section of Stock Returns
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2080759
Abstract:
Previous research describes the net share issuance anomaly in U.S. stocks as pervasive, both in size-based sorts and in cross-section regressions. As a further test of its pervasiveness, this paper undertakes an in-depth study of share issuance effects in the Australian equity market. The anomaly is observed in all size stocks except micro stocks. For example, equal weighted portfolios of non-issuing big stocks outperform portfolios of high issuing big stocks by an average of 0.84% per month over 1990–2009. This outperformance survives risk adjustment and appears to subsume the asset growth effect in Australian stock returns.
#209 – Volatility Of Volatility Effect in Stocks
Period of rebalancing: Monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1996 – 2009
Indicative performance: 10.56%
Estimated volatility: 12.20%
Source paper:
Baltussen, Van Bekkum, Van Der Grient: Unknown Unknowns: Vol-of-Vol and the Cross Section of Stock Returns
http://www.efa2012.org/papers/s2g1.pdf
Abstract:
This paper investigates how uncertainty about expected stock returns is priced in the cross-section of stocks. Uncertainty is proxied by the volatility of option-implied volatility (vol-of-vol), with higher vol-of-vol signaling more uncertainty among investors about expected stock returns. We find that high vol-of-vol stocks underperform low vol-of-vol stocks by circa 0.85 percent over the next month, or about 10 percent per year. This negative vol-of-vol e ect cannot be explained by exposures to many previously documented factors, persists for more than 18 months, and also holds in a sample of ADRs. Statistical tests cannot con rm that the vol-of-vol e ect is driven by arbitrage frictions and optimism bias, or by exposures to jump risk or stochastic volatility risk. Moreover, we do not nd vol-of-vol to be a priced risk factor in traditional asset pricing models, or to re ect higher-order risk. Our results seem inconsistent with rational pricing of uncertainty by a representative agent, and indicate strong information linkages between option and stock markets.
New research paper related to existing strategies:
#77 – Beta Factor in Stocks
Frazzini, Kabiller, Pedersen: Buffett's Alpha
http://www.econ.yale.edu/~af227/pdf/Buffett%27s%20Alpha%20-%20Frazzini,%20Kabiller%20and%20Pedersen.pdf
Abstract:
Berkshire Hathaway has a higher Sharpe ratio than any stock or mutual fund with a history of more than 30 years and Berkshire has a significant alpha to traditional risk factors. However, we find that the alpha become statistically insignificant when controlling for exposures to Betting-Against-Beta and quality factors. We estimate that Berkshire’s average leverage is about 1.6-to-1 and that it relies on unusually low-cost and stable sources of financing. Berkshire’s returns can thus largely be explained by the use of leverage combined with a focus on cheap, safe, quality stocks. We find that Berkshire’s portfolio of publicly-traded stocks outperform private companies, suggesting that Buffett’s returns are more due to stock selection than to a direct effect on management.
