New strategies:
#327 – Investor Sentiment and Momentum Effect in Currencies
Period of rebalancing: monthly
Markets traded: currencies
Instruments used for trading: forwards, swaps, futures, CFDs
Complexity: Moderately complex strategy
Bactest period: 1976 – 2010
Indicative performance: 5.80%
Estimated volatility: 10.36%
Source paper:
Maryniak: Investor sentiment, attention and profitability of currency momentum strategies
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2862161
Abstract:
Essay analyzes the relationship between the profitability of currency momentum strategy and its potential sources – investor sentiment and investor attention. Evidence supporting the existence of relationship between investor sentiment and currency momentum is presented. It seems that this relationship is different than for equity momentum. Investor sentiment seems to affect in the opposite way long and short leg of currency momentum strategy. It seems that adjusting currency momentum for this relationship can magnify its profitability. Investor attention also seems to have an impact on the profitability of currency momentum which seems to be the most profitable for low attention currencies.
#328 – Spread Trading with ADRs
Period of rebalancing: daily
Markets traded: equities
Instruments used for trading: ETFs
Complexity: Simple strategy
Bactest period: 2005-2015
Indicative performance: 14.00%
Estimated volatility: 16.35%
Source paper:
Leung, Kang: Asynchronous ADRs: Overnight vs Intraday Returns and Trading Strategies
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2858048
Abstract:
American Depositary Receipts (ADRs) are exchange-traded certificates that represent shares of non-U.S. company securities. They are major financial instruments for investing in foreign companies. Focusing on Asian ADRs in the context of asynchronous markets, we present methodologies and results of empirical analysis of their returns. In particular, we dissect their returns into intraday and overnight components with respect to the U.S. market hours. The return difference between the S&P500 index, traded through the SPDR S&P500 ETF (SPY), and each ADR is found to be a mean-reverting time series, and is fitted to an Ornstein-Uhlenbeck process via maximum-likelihood estimation (MLE). Our empirical observations also lead us to develop and backtest pairs trading strategies to exploit the mean-reverting ADR-SPY spreads. We find consistent positive payouts when long position in ADR and short position in SPY are simultaneously executed at selected entry and exit levels.
New research papers related to existing strategies:
#146 – Timing Commodity Momentum
Sorensen: Commodity Markets: An Updated Study of the “Timed Momentum” Trading Strategy
https://brage.bibsys.no/xmlui/bitstream/handle/11250/2401815/S%C3%B8rensen2016.pdf?sequence=1
Abstract:
This thesis provides the reader with an updated study of the “timed momentum” strategy proposed by Miffre and Basu (2008). The main objective of this thesis is to see if the “timed momentum” trading strategy is still profitable, given newer and additional data. Hence, this thesis extends the sample period to capture both a bear and a bull market for commodities, and is inspired by the general need for research to support or reject previous findings. My results shows that the “timed momentum” strategy is on average still profitable, but that the average risk associated with it has risen.
#324 – Risk-Managed Industry Momentum
Du Plessis, Hallerbach: Volatility Weighting Applied to Momentum Strategies
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2599635
Abstract:
We consider two forms of volatility weighting (own volatility and underlying asset volatility) applied to cross-sectional and time-series momentum strategies. We present some simple theoretical results for the Sharpe ratios of weighted strategies and show empirical results for momentum strategies applied to US industry portfolios. We find that both the timing effect and the stabilizing effect of volatility weighting are relevant for the improvement in Sharpe ratios. We also introduce a dispersion weighting scheme which treats cross-sectional dispersion as (partially) forecastable volatility. Although dispersion weighting improves the Sharpe ratio, it seems to be less effective than volatility weighting.
Two additional related research papers have been included into existing free strategy reviews during last 2 week:
#7 – Volatility Effect in Stocks – Long-Only Version
#77 – Beta Factor in Stocks
#78 – Beta Factor in Country Equity Indexes
Andricopoulos: Leverage As A Weapon of Mass Shareholder-Value Destruction; Another Look at the Low-Beta Anomaly
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2859363
Abstract:
The 'low-beta' or 'low-volatility anomaly' is one of the most researched in the field of 'alternative beta'. Despite strong published evidence going back to the 1970s that high beta/volatility stocks underperform relative to expectations generated by the Capital Asset Pricing Model (CAPM), the anomaly still persists. The explanations given for this are all behavioural; that investor biases lead to overpricing of high volatility stocks. This paper shows that investor biases cannot be the explanation for the anomaly. Instead, it is proposed that the anomaly stems from a destruction of shareholder value. The strong implication is that the more market leverage a firm has, the more shareholder value is destroyed. Although the prevailing view for a long time has been that adding debt is good for shareholders, making balance sheets more 'efficient', there is in fact a considerable volume of evidence that the opposite is true; evidence which has been incorrectly interpreted for many years. Some possible mechanisms for this shareholder-value destruction are proposed.
#12 – Pairs Trading with Stocks
Riedinger: Idiosyncratic Risk, Costly Arbitrage and Asymmetry: Evidence from Pairs Trading
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2833800
Abstract:
This paper explains the idiosyncratic risk puzzle in a novel test setting with a combination of arbitrage risk and arbitrage asymmetry as in Stambaugh/Yu/Yuan (2015). We utilize the popular investment strategy pairs trading to identify a different kind of mispricing and find a dominant negative (positive) relationship among overpriced (underpriced) stocks between idiosyncratic volatility and returns in the US stock market between 1990 and 2014. The return rises for higher idiosyncratic risk levels, however not monotonically contrary to related papers. We clarify this issue with a profound analysis of the pairs trading’s algorithm and demonstrate how the technical drivers, volatility and correlation, influence returns. Our findings reveal why pairs trading’s profitability varies across markets, industries, over time, and firm characteristics, and how to improve the trading strategy. Double-sorted portfolios on volatility and correlation earn significant risk-adjusted monthly returns of up to 76bp, which is 43bp more than the traditional portfolio earns.
