New strategies:
#288 – Combining Momentum, Term Structure, and Idiosyncratic Volatility within Commodities
Period of rebalancing: monthly
Markets traded: commodities
Instruments used for trading: futures, CFDs
Complexity: Simple strategy
Bactest period: 1985 – 2011
Indicative performance: 7.38%
Estimated volatility: 10.79%
Source paper:
Fuertes, Miffre, Fernandez-Perez: Commodity Strategies Based on Momentum, Term Structure and Idiosyncratic Volatility
http://www.edhec-risk.com/edhec_publications/all_publications/RISKReview.2013-05-14.5720/attachments/EDHEC_Working_Paper_Commodity_Strategies.pdf
Abstract:
This article demonstrates that momentum, term structure and idiosyncratic volatility signals in commodity futures markets are not overlapping, which motivates the design of a new triple-screen strategy. Over the period between January 1985 and August 2011, systematically buying contracts with high past performance, high roll-yield and low idiosyncratic volatility, while shorting contracts with poor past performance, low roll-yields and high idiosyncratic volatility generates an average Sharpe ratio that is five times that of the S&P-GSCI. The triple-screen strategy dominates each of the individual strategies and its risk-adjusted performance cannot be attributed to overreaction, liquidity risk or neglecting transaction costs.
#289 – Google Search Strategy Based on Limited Investor Attention
Period of rebalancing: weekly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Simple strategy
Bactest period: 2004 – 2014
Indicative performance: 19.30%
Estimated volatility: 21.40%
Source paper:
Storms, Kapraun, Rudolf: In Search of Alpha – Trading on Limited Investor Attention
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2676583
Abstract:
In this study we develop a trading strategy that exploits limited investor attention. Trading signals for US S&P 500 stocks stocks are derived from Google Search Volume data, taking a long position if investor attention for the corresponding security was abnormally low in the past week. Our strategy generates 19% average annual return and thereby outperforms a simple market buy-and-hold strategy. After controlling for the well-known risk factors, a significant alpha (abnormal return) of 10% p.a. remains. Returns are sufficiently large to cover transaction costs.
New research papers related to existing strategies:
#16 – Mean Reversion Effect in Country Equity Indexes
Gharaibeh: Long-Term Contrarian Profits in the Middle East Market Indices
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2684807
Abstract:
This paper examines whether there is an existence of a long-term contrarian profits at the Middle East (ME) market indices. This paper shows strong evidence for the long-term contrarian strategy in the Middle East indices. The result of this study demonstrates that the long-term contrarian profits for the Middle East markets can’t be explained by two-factor model. In spite of whether winners are smaller or larger than losers, there are long-term abnormal profits. Finally, the findings in this paper suggest that the long-term contrarian profits may be stronger and more enveloping than is usually understood.
#152 – Momentum Effect in REITs
#193 – Trendfollowing Effect within REITs
Moss, Clare, Thomas, Seaton: Trend Following and Momentum Strategies for Global REITs
http://www.valuewalk.com/wp-content/uploads/2015/06/SSRN-id2615686.pdf
Abstract:
This study investigates whether the risk adjusted returns of a global REIT portfolio would be enhanced by adopting a trend following strategy (which is an absolute concept), a momentum based strategy (which is a relative concept and requires individual country allocations), or indeed a combination of the two. We examine the results in terms of both a dedicated Global REIT exposure, and the impact on a multi †asset portfolio. We find that the main improvements arise when the broad index is replaced with one of the four trend following (TF) strategies. The portfolios deliver similar returns but volatility is reduced by up to a quarter to the 8â€9% range, the Sharpe ratios increase by 0.1 to 0.5 with the main benefit being the reduction in the maximum drawdown to under 30% compared to 43% when the broad index was used. We thus find that a combined momentum and trend following Global REIT strategy can be beneficial for both a dedicated REIT portfolio and adding REITs to a multiâ€asset portfolio.
Two additional related research paper have been included into existing free strategy reviews during last 2 week:
#5 – FX Carry Trade
Jung, Lee: A Liquidity-Based Resolution of the Uncovered Interest Parity Puzzle
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2685534
Abstract:
A new monetary theory is set out to resolve the "Uncovered Interest Parity (UIP)" Puzzle. It explores the possibility that liquidity properties of money and nominal bonds can account for the puzzle. A key concept in our model is that nominal bonds carry liquidity premia due to their medium of exchange role as either collateral or means of payment. In this framework no-arbitrage ensures a positive comovement of real return on money and nominal bonds. Thus, when inflation in one country becomes relatively lower, i.e., real return on this currency is relatively higher, its nominal bonds should also yield higher real return. We show that their nominal returns can also become higher under the economic environment where collateral pledgeability and/or liquidity of nominal bonds and/or collateralized credit based transactions are relatively bigger. Since a currency with lower inflation is expected to appreciate, the high interest currency does indeed appreciate in this case, i.e., the UIP puzzle is no longer an anomaly in our model. Our liquidity based theory can in fact help understanding many empirical observations that risk based explanations find difficult to reconcile with.
#3 – Sector Momentum – Rotational System
#14 – Momentum Effect in Stocks
Heidari: Over or Under? Momentum, Idiosyncratic Volatility and Overreaction
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2687480
Abstract:
Several studies have attributed the high excess returns of the momentum strategy in the equity market to investor behavioral biases. However, whether momentum effects occur because of investor underreaction or because of investor overreaction remains a question. Using a simple model to illustrate the linkage between idiosyncratic volatility and investor overreaction as well as the stock turnover as another measure of overreaction, I present evidence that supports the investor overreaction explanation as the source of momentum effects. Furthermore, I show that when investor overreaction is low, momentum effects are more due to industries (industry momentum) rather than stocks.
