New strategies:
#323 – Timing the Small Cap Effect ver. 3
Period of rebalancing: monthly
Markets traded: equities
Instruments used for trading: stocks, ETFs
Complexity: Simple strategy
Bactest period: 1990-2014
Indicative performance: 11.94%
Estimated volatility: 14.96%
Source paper:
Bansal, Connolly, Stivers: High Risk Episodes and the Equity Size Premium
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2845610
Abstract:
Over the 1960-2014 period, we find that the equity size premium is pervasively positive, sizable, and statistically significant solely over periods that follow a high-risk month; defined as a month that ends with the expected market volatility being in its top quintile. Following the other lower-risk months, the size premium is essentially zero and statistically insignificant. Conditional CAPM alphas for Small-minus-Big (SMB) long/short portfolio returns also exhibit a very similar risk-based contingent variation. Our results indicate a nonlinear positive intertemporal risk/return relation for the equity size premium, seemingly attributed to high-risk episodes where small-cap stocks face relatively higher market volatility-, default-, and illiquidity-risk. Our findings suggest support for: (1) Hahn-Lee’s (2006) and Kapadia’s (2011) view that default risk has a role for understanding the size premium, (2) Acharya-Pedersen’s (2005) implication that illiquidity shocks can predict higher future returns, and (3) Ang et al’s (2006) view that stocks with a more negative sensitivity to market volatility innovations should have a higher risk premium.
#324 – Risk-Managed Industry Momentum
Period of rebalancing: monthly
Markets traded: equities
Instruments used for trading: ETFs
Complexity: Simple strategy
Bactest period: 1927-2014
Indicative performance: 25.64%
Estimated volatility: 32.15%
Source paper:
Grobys, Ruotsalainen, Äijö: Risk-managed industry momentum and momentum crashes
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2844140
Abstract:
This is the first paper that investigates Barosso and Santa-Clara’s (2015) risk-managed momentum strategy in an industry momentum setting. We investigate traditional momentum strategies and Novy-Marx (2012) strategy. We also explore the impact of different variance forecast horizons on the average payoffs. We find that risk-managed industry momentum payoffs generate considerably higher returns than plain momentum strategies. Notably, risk-managed payoffs increase linearly as the time window for variance forecasts are contracted which is consistent for all different strategies.
New research papers related to existing strategies:
#49 – S&P 500 Index Addition Effect
Huij, Kyosev: Price Response to Factor Index Additions and Deletions
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2846982
Abstract:
Abnormal price reaction around S&P 500 index changes has been considered as strong evidence that long term demand for stocks is downward sloping. This notion, however, has recently lost popularity due to the evidence that new additions are accompanied with a contemporaneous change in future earnings expectations. In this study we show that factor index rebalancing is a true information free event. The cumulative abnormal return from announcement to effective day is 1.07% for new additions and -0.91% for new deletions and around two-thirds of this effect is permanent. We find a direct relationship between the magnitude of abnormal returns and the abnormal volume coming from index funds. The documented effect results in a direct loss to index fund investors of 16.5 bps per annum.
#151 – EBIDTA/TEV Measure Effect
Crawford, Gray, Vogel, Xu: Why Do Enterprise Multiples Predict Expected Stock Returns?
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2847874
Abstract:
The enterprise multiple (EM) effect has been documented across global stock markets. EM is a robust predictor of expected average returns and generates a much stronger value effect than traditional value metrics. We find evidence the EM effect is primarily attributable to mispricing and not due to higher systematic risk. We document that earnings announcement returns, forecast errors, and forecast revisions all support the notion that the EM effect is driven by mispricing associated with predictable investor expectation errors. Finally, we show that the EM effect is stronger during times of strong market sentiment, which also supports the mispricing-based hypothesis.
Two additional related research papers have been included into existing free strategy reviews during last 2 week:
#118 – Time Series Momentum Effect
Dao, Nguyen, Deremble, Lemperiere, Bouchaud, Potters: Tail Protection for Long Investors: Trend Convexity at Work
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2777657
Abstract:
The performance of trend following strategies can be ascribed to the difference between long-term and short-term realized variance. We revisit this general result and show that it holds for various definitions of trend strategies. This explains the positive convexity of the aggregate performance of Commodity Trading Advisors (CTAs) which — when adequately measured — turns out to be much stronger than anticipated. We also highlight interesting connections with so-called Risk Parity portfolios. Finally, we propose a new portfolio of strangle options that provides a pure exposure to the long-term variance of the underlying, offering yet another viewpoint on the link between trend and volatility.
#307 – Reversal During Earnings-Announcements
Jansen, Nikiforov: Fear and Greed: a Returns-Based Trading Strategy around Earnings Announcements
http://www.wsj.com/public/resources/documents/FearandGreedJPM0922.pdf
Abstract:
This study documents that earnings announcements serve as a reality check on short-term, fear and greed driven price development: stocks with extreme abnormal returns in the week before an earnings announcement experience strong price reversal around the announcement. A trading strategy that exploits this reversal is profitable in 40 of the last 42 years and earns abnormal returns in excess of 1.3% over a two day-window.
