New strategies:
#174 – Institutional Ownership Effect
Period of rebalancing: Quarterly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Very complex strategy
Bactest period: 1983 – 2007
Indicative performance: 15%
Estimated volatility: 21%
Source paper:
Dimitrov, Gatchev: Do Institutions Pay to Play? Turnover of Institutional Ownership and Stock Returns
http://www2.binghamton.edu/som/files/Playing_the_market_Dimitrov.pdf
Abstract:
We examine the relation between stock returns and turnover of institutional ownership. Based on ten portfolios, we find that the portfolio of stocks with the highest turnover of institutional ownership earns 8.9% lower subsequent one-year returns than the portfolio of stocks with the lowest turnover of institutional ownership. These findings are consistent with the theory of Harrison and Kreps (1978) and Scheinkman and Xiong (2003), where the expectation of trading profits leads to high turnover of ownership and a premium in asset prices. We further examine the two components of turnover of institutional ownership — one due to trading of institutions with individuals and the other due to trading among institutions. We find that only turnover of ownership between institutions and individuals is negatively related to subsequent stock returns, which is consistent with the idea that institutions expect higher profits when trading against individual investors than when trading against other institutions. We also find that the negative relation between future returns and turnover of ownership between institutions and individuals is stronger for stocks that, according to the theory, are more likely to be subject to speculative trading (i.e., stocks with higher overall trading activity, higher return volatility, and lower book-to-market). Overall, our findings support the prediction that investors may pay a premium in anticipation of profitable trading opportunities.
#175 – Pairs Trading on Intraday Basis
Period of rebalancing: Intraday
Markets traded: equities
Instruments used for trading: stocks
Complexity: Very complex strategy
Bactest period: 2006 – 2007
Indicative performance: 10.23%
Estimated volatility: 4.98%
Source paper:
Bowen, Hutchinson, O'Sullivan: High Frequency Equity Pairs Trading: Transaction Costs, Speed of Execution and Patterns in Returns
http://www.ucc.ie/en/cir/papers/High-Frequency-Pairs-Trading.pdf
Abstract:
In this paper we examine the characteristics of high frequency pairs trading using a sample of FTSE100 constituent stocks for the period January to December 2007. We show that the excess returns of the strategy are extremely sensitive both to transaction costs and speed of execution. When we specify a moderate level of transaction costs (15 basis points) the excess returns of the strategy are reduced by more than 50%. Likewise, when we implement a wait one period restriction on execution the returns of the strategy are eliminated. When we further examine the time series properties of pairs trading returns we see that the majority of returns occur in the first hour of trading. Finally, we find that the excess returns bear little exposure to traditional risk factors but are weakly related to market and reversal risk factors.
New research papers related to existing strategies:
#62 – Shorting Overvalued Stocks
Beneish, Lee, Nichols: Fraud Detection and Expected Returns
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1998387
Abstract:
An accounting-based model has strong out-of-sample power not only to detect fraud, but also to predict cross-sectional returns. Firms with a higher probability of manipulation (MSCORE) earn lower returns in every decile portfolio sorted by: Size, Book-to-Market, Momentum, Accruals, and Short-Interest. We show that the predictive power of MSCORE is related to its ability to forecast the persistence of current-year accruals, and is most pronounced among low-accrual (ostensibly high earnings-quality) stocks. Most of the incremental power derives from measures of firms’ predisposition to manipulate, rather than their level of aggressive accounting. Our evidence supports the investment value of careful fundamental analysis, even among public firms.
