New strategies:
#414 – Patent-to-Market Equity Factor
Period of rebalancing: yearly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Very complex strategy
Bactest period: 1965 – 2011
Indicative performance: 5.91%
Estimated volatility: 11.70%
Source paper:
Qiu, Jiaping and Tseng, Kevin and Zhang, Chao: Patent-to-Market Premium
https://ssrn.com/abstract=3285921
Abstract:
A firm’s patent-to-market (PTM) ratio refers to the percentage of a firm’s market value that is attributable to its patent market value. A hedging portfolio based on PTM ratio generates a monthly return of 71 basis points. The CAPM cannot be rejected for firms with low PTM ratios, but is rejected for firms with high PTM ratios. PTM ratio is a priced factor distinct from known factors in the cross-section of stock returns. PTM ratio is positively associated with future profitability. Our analysis suggests that real option is the channel through which PTM ratio predicts future stock returns.
#415 – Sovereign CDS Predicts FX Market Return
Period of rebalancing: monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Simple strategy
Bactest period: 2007 – 2017
Indicative performance: 4.84%
Estimated volatility: 5.92%
Source paper:
Giovanni Calice and Ming Zeng: The Term Structure of Sovereign CDS and the Cross-Section Exchange Rate Predictability
http://www.bbk.ac.uk/ems/research/Seminar_info/spring-17-18/Giovanni%20CALICE%20-%20Paper_Sovereign_CDS_2018.pdf
Abstract:
We provide novel evidence on exchange rate predictability by using the term premia of the sovereign credit default swap (CDS). Using a sample of 29 countries, we ï¬nd that the sovereign CDS term premia signiï¬cantly predict the exchange rate out-of-sample. On average, a steeper CDS spread curve for a country predicts its currency appreciation against the US dollar (USD). Empirically, while the sovereign CDS level mainly reflects global risk, the information in the term structure of the sovereign CDS spreads reveals country-speciï¬c risk. Notably, the predictive power of the term premia is robust after controlling for the sovereign CDS level and other conventional macroeconomic factors. Further analysis shows that the information in the sovereign CDS term structure is also helpful for forecasting other important ï¬nancial markets such as the stock markets in different countries.
New research papers related to existing strategies:
#75 – Federal Open Market Committee Meeting Effect in Stocks
#212 – Scheduled Economic Announcements Effect in Stocks
Hu, Pan, Wang, Zhu: Premium for Heightened Uncertainty: Solving the FOMC Puzzle
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3290649
Abstract:
Lucca and Moench (2015) document that prior to the announcement from FOMC meetings, the stock market yields substantial returns without major increase in conventional measures of risk. This presents a “puzzle” to the simple risk-return connection in most (static) asset pricing models. We hypothesis that the arrival of macroeconomic news, with FOMC announcements at the top of the list, brings heightened uncertainty to the market, as investors cautiously await and assess the outcome. While this heightened uncertainty may not be accurately captured by conventional risk measures, its dissolution occurs during a short time window, mostly prior to the announcement, bringing a significant price appreciation. This hypothesis leads to two testable implications: First, we should see similar return patterns for other pre-scheduled macroeconomic announcements. Second, to the extent that we can find other proxies for heightened uncertainty, we should also observe abnormal returns accompanying its dissolution. Indeed, we find large pre-announcement returns prior to the releases of Nonfarm Payroll, GDP and ISM index. Using CBOE VIX index as a primitive gauge for market uncertainty, we find disproportionally large returns on days following large spike-ups in VIX. Akin to the FOMC result, we find that while such heightened-uncertainty days occur on average only eight times per year, they account for more than 30% of the average annual return on the S&P 500 index. Conversely, we find a gradual but significant build-up in VIX prior to FOMC days, providing direct evidence of heightened uncertainty.
#110 – Speculators’ Effect in Commodities
Fan, Fernandez-Perez, Fuertes, Miffre: Speculative Pressure
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3279425
Abstract:
The article establishes that speculative pressure, or the net positions of speculators, governs the pricing of futures contracts in commodity, currency and equity index markets. Systematically buying the futures with net long speculation and shorting the futures with net short speculation generate Sharpe ratios of similar magnitude to those previously reported on momentum or carry. The speculative pressure portfolios are found to explain the cross section of futures returns even within pricing models that account for momentum, carry or global risk premia. The performance of the speculative pressure portfolios is robust to the consideration of transaction costs, liquidity concerns, alternative speculative pressure signals, several portfolio construction techniques, different ranking and holding periods and various subsamples. The analysis however does not extend to fixed income futures markets where it is optimal for investors to be long only.
And two additional related research papers have been included into existing free strategy reviews during last 2 weeks:
#75 – Federal Open Market Committee Meeting Effect in Stocks
Martello, Ribeiro: Pre-FOMC Announcement Relief
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3286745
Abstract:
We show that the pre-FOMC announcement drift in equity returns occurs mostly in periods of high market uncertainty or risk premium. Specifically, this abnormal return is explained by a significant reduction in the risk premium (implied volatility and variance risk premium) prior to the announcement, but only when the risk premium is high, e.g., when it is above its median. Likewise, the magnitude of the FOMC Cycle and other related patterns varies with uncertainty and risk premium. Market uncertainty measures are persistent and are not related to policy uncertainty or expectations. Markets become only marginally stressed in the days prior to the announcement and changes in uncertainty appear to be of lower frequency. We also explain why recent studies suggest that the pre-FOMC drift might have disappeared in the past decade, as this moderation is due to time variation that was also present in older data. Additionally, CAPM only works on FOMC dates when the risk premium is high, e.g., implied vol above its prior median level. The results are robust to different samples and measures of risk premium and uncertainty.
#129 – Dollar Carry Trade
#8 – FX Momentum
Jiang: US Fiscal Cycle and the Dollar
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3278339
Abstract:
When the US fiscal condition is strong, the dollar is strong and continues to appreciate against foreign currencies in the next 3 years. This pattern is unique to the US, explaining 50% of the low-frequency variation in the dollar’s value and absorbing the return predictability of the forward premium. In a model with sticky prices, I show this pattern is driven by the comovement between the US fiscal cycle and the US investors’ risk appetite: During US expansions, higher US government surpluses increase the nominal value of the dollar, while less risk-averse US investors require lower returns to hold foreign currencies. Consistent with this view, the US fiscal cycle also explains the term premium, the dollar carry trade, the currency return momentum, and the US investors’ capital flows.
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