New strategies:
#236 – Spin-off Anomaly
Period of rebalancing: Daily
Markets traded: equities
Instruments used for trading: stocks
Complexity: Simple strategy
Bactest period: 1965 – 2000
Indicative performance: 19.40%
Estimated volatility: not stated
Source paper:
McConnell, Ovtchinnikov: Predictability of Long-Term Spinoff Returns
http://www2.owen.vanderbilt.edu/alexeiovtchinnikov/Predictability%20of%20long-term%20spinoff%20returns.pdf
Abstract:
Investment strategies of buying and holding recently spun off companies and their parents have received significant attention from the investment community in the recent past. Despite their popularity, the existing evidence on the attractiveness of spinoffs appears piecemeal. In this paper, we examine in detail stock price performance of spinoffs and their parents on a comprehensive sample that covers the last 36 years. We show that excess returns are indeed positive for both subsidiary and parent companies over almost all holding periods considered. For subsidiaries the results appear both economically and statistically significant after various adjustments for risk. This evidence is consistent with investors earning an above normal rate of return by investing in recently spun off subsidiaries. For parents, however, after correcting for one very large positive outlier, returns are not statistically or economically different from zero.
New research papers related to existing strategies:
#12 – Pairs Trading with Stocks
Caldeira, Moura: Selection of a Portfolio of Pairs Based on Cointegration: A Statistical Arbitrage Strategy
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2196391
Abstract:
Statistical arbitrage strategies, such as pairs trading and its generalizations, rely on the construction of mean- reverting spreads with a certain degree of predictability. This paper applies cointegration tests to identify stocks to be used in pairs trading strategies. In addition to estimating long-term equilibrium and to model the resulting residuals, we select stock pairs to compose a pairs trading portfolio based on an indicator of profitability evaluated in-sample. The profitability of the strategy is assessed with data from the São Paulo stock exchange ranging from January 2005 to October 2012. Empirical analysis shows that the proposed strategy exhibit excess returns of 16.38% per year, Sharpe Ratio of 1.34 and low correlation with the market.
#173 – Market Timing Filter Applied to a Classical Stock Anomalies
Goyal, Saretto: Option Returns and Volatility Mispricing
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=889947
Abstract:
We study the cross-section of stock options returns and find an economically important source of mispricing in individual equity options. Sorting stocks based on the difference between historical realized volatility and market implied volatility, we find that a zero-cost trading strategy that is long (short) in straddles, with a large positive (negative) difference in these two volatility measures, produces an economically important and statistically significant average monthly return. The results are robust to different market conditions, to firm risk-characteristics, to various industry groupings, to options liquidity characteristics, and are not explained by linear factor models.
#221 – Timing Carry Trade v2
Lu, Jacobsen: Cross-Asset Return Predictability between Currency Carry Trades and Stocks
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2211325
Abstract:
Changes in either equity volatility, or the world equity index, predict carry trade profits. The predictive effect goes only one way, from stock to currency markets. Carry trade profits, or changes in currency volatility, generally do not predict world equity index returns. If FX traders focus mostly on macro-economic information, while stock market investors consider company information as well, this exposure of FX traders to a smaller information set could explain our results.
Londono, Zhou: Variance Risk Premiums and the Forward Premium Puzzle
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2209753
Abstract:
This paper presents evidence that the foreign exchange appreciation is predictable by the currency variance risk premium at a medium 6-month horizon and by the stock variance risk premium at a short 1-month horizon. Although currency variance risk premiums are highly correlated with each other over longer horizons, their correlations with stock variance risk premiums are quite low. Interestingly the currency variance risk premium has no predictive power for stock returns. We rationalize these findings in a consumption-based asset pricing model with orthogonal local and global economic uncertainties. In our model the market is incomplete in the sense that the global uncertainty is not priced by local stock markets and is therefore a forex-specific phenomenon — the currency uncertainty’s effects on the expected stock return are off-setting between the cash flow channel and the volatility channel.
