New strategies:
#246 – Trading on the Dividend Paydate
Period of rebalancing: daily
Markets traded: equities
Instruments used for trading: stocks
Complexity: Simple strategy
Bactest period: 1996 – 2009
Indicative performance: 70.20%
Estimated volatility: 27.50%
Source paper:
Berkman, Koch: Drained by DRIPS: The Hidden Cost of Buying on the Dividend Pay Date
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2172448
Abstract:
On the day that dividends are paid we find a significant positive mean abnormal return, followed by a reversal that negates most of this price appreciation. This temporary dividend pay date effect has grown in magnitude since the 1970’s, and is concentrated among high dividend yield stocks that offer dividend reinvestment plans (DRIPs). Since the mid-1990s, these stocks yield a mean abnormal return close to 0.5% on the dividend pay date. This temporary inflation is larger in magnitude for stocks subject to greater limits to arbitrage. Quarterly profits from a trading strategy to exploit this anomaly are economically significant, and related to time series movements in market sentiment, transaction costs, the dividend premium, and the VIX. For investors who reinvest their dividends on the pay date, this temporary inflation represents a substantial implicit transaction cost.
New research papers related to existing strategies:
#5 – FX Carry Trade
Cen, Marsh: Off the Golden Fetters: Examining Interwar Carry Trade and Momentum
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2358456
Abstract:
We study the properties of carry trade and momentum returns in the interwar period, 1921:1-1936:12. We find that currencies with higher interest rates outperform currencies with lower interest rates by about 7% per annum, consistent with estimates from modern samples, while a momentum strategy that is long past winner and short past loser currencies rewards an average annual excess return of around 7% in the interwar sample, larger than its modern counterparts. On the grounds that the interwar period represents rare events better than modern samples, we provide evidence unfavorable to the rare disaster based explanation for the returns to the carry trade and momentum. Global FX volatility risk, however, turns out to account for the carry trade return in the interwar sample as well as in modern samples.
#118 – Time Series Momentum Effect
Hachemian, Tavernier, Van Royen: The Significance of Trading Frequency and Stop Loss in Trend Following Strategies
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2349848
Abstract:
We investigate the impact of two practices generally leading to increased trading on a generic trend following model; the frequency of trading and stop loss rules. For generality, we use one of the most widely used indicators the moving average cross over and simulate portfolios comprised of liquid global futures markets. Firstly, we examine the return streams of daily vs. weekly traded portfolios. Contrary to the general expectation that a higher frequency of trading is more beneficial, we find that when applied to the same strategies, daily trading of portfolios does not significantly improve risk and return characteristics of the strategies. Secondly, we analyze the impact of implementing simple stop loss rules to both sets of portfolios. We find that these rules are the most effective in preventing severe losses but results are more ambiguous when the losses are within expected limits.
Li: Hedge Fund Exposure to Time-Series Momentum Strategies
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2355886
Abstract:
This project proposes to investigate the exposure to time-series momentum strategy by hedge funds with various trading strategies. In particular, the project attempts to explain the fund return by including time-series momentum strategies factors into traditional Fung and Hsieh’s nine-factor model. The aim of the project is twofold. Firstly, to explore what types of hedge fund exposure more to the time-series momentum strategy. Secondly, if the hedge fund return relies on time-series momentum strategy, how does the dependence changes over time. The findings of this piece of research provide useful evidence that global macro fund and market neutral fund follow time-series momentum strategies. Global macro funds get more exposure to monthly time-series momentum as the strategy exhibits positive return. Market neutral fund returns follow the similar pattern. This piece of research may provide insight for researcher to extend Baltas and Kieslowski’s momentum strategies in futures market and trend-following funds to other types of hedge fund.
