New strategies:
#258 – FX Value v2 – Real Exchange Rate Changes
Period of rebalancing: monthly
Markets traded: currencies
Instruments used for trading: futures, forwards, swaps, CFDs
Complexity: Complex strategy
Bactest period: 1977 – 2013
Indicative performance: 9.57%
Estimated volatility: 9.51%
Source paper:
Raza, Marshall, Visaltanachoti: Currency Value Strategies
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2559375
Abstract:
We run a horse race of four currency value strategies. Tests conducted on 39 developed and emerging market currencies show real exchange rate level strategies generate the largest excess returns on intervals up to one 1 month, while real exchange rate changes produce the largest excess returns for intervals of 1-12 months. Purchasing power parity and Big-Mac index approaches underperform. However, a combination approach based on all four value techniques generates excess returns of over 10%. The returns are not explained by economic state variables or currency risk factors and are larger than estimated transaction costs.
#259 – FX Value v3 – Real Exchange Rate Levels
Period of rebalancing: weekly
Markets traded: currencies
Instruments used for trading: futures, forwards, swaps, CFDs
Complexity: Complex strategy
Bactest period: 1972 – 2013
Indicative performance: 6.91%
Estimated volatility: 9.53%
Source paper:
Raza, Marshall, Visaltanachoti: Currency Value Strategies
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2559375
Abstract:
We run a horse race of four currency value strategies. Tests conducted on 39 developed and emerging market currencies show real exchange rate level strategies generate the largest excess returns on intervals up to one 1 month, while real exchange rate changes produce the largest excess returns for intervals of 1-12 months. Purchasing power parity and Big-Mac index approaches underperform. However, a combination approach based on all four value techniques generates excess returns of over 10%. The returns are not explained by economic state variables or currency risk factors and are larger than estimated transaction costs.
New research papers related to existing free strategies:
#26 – Value (Book-to-Market) Anomaly
Hsu, Myers, Whitby: Timing Poorly: A Guide to Generating Poor Returns While Investing in Successful Strategies
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2560434
Abstract:
Value investing is viewed as a historically successful investment strategy. The literature generally agrees on the robustness of the strategy but disagrees on the explanations for the success. While the empirical research focuses exclusively on the time-series returns — or the buy-and-hold return — of a value portfolio, the investor experience is, of course, driven by the internal rate of return (IRR) — or the dollar-weighted average return. Although the buy-and-hold average portfolio return may be the proper way to document the anomaly, the dollar-weighted average return can shed light on some interesting questions which cannot be addressed by analyzing the buy-and-hold returns. In particular, examining the dollar-weighted returns allows us to ask whether investors have actually generated superior IRR consistent with the reported buy-and-hold outperformance of value strategies.
#83 – Pre-Holiday Effect
Carchano, Tornero: The Pan-European Holiday Effect
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2556949
Abstract:
The construction of a single European block in the context of financial markets has caused the different national stock exchanges of the euro area to converge towards one common trading calendar that allows to study whether the holiday effect is a pan-European calendar anomaly or country-specific. By applying simulation methods, we provide evidence of the existence of statistically and economically abnormal positive pre- and post-holiday returns in the Eurozone which are not related to higher than average levels of volatility, but which can be explained by the preference of investors to avoid selling around European holidays.
#118 – Time Series Momentum Effect
Hutchinson, O'Brien: Trend Following and Macroeconomic Risk
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2550718
Abstract:
We examine the relationship between the returns of trend following and macroeconomic risk. Our results demonstrate that macroeconomic factors do have a statistically significant relationship with trend following, when we allow for the dynamic exposures of the strategy. We find that this time varying risk exposure allows trend following to generate positive returns across a wide range of bond and equity market cycles. Prior research has documented that the majority of cross sectional momentum returns are derived from macroeconomic risk exposures. However, the same is not true for trend following where at least half of performance comes from the unexplained components of futures returns. When we relate performance to the conditional volatility of macroeconomic variables, our results show that trend following generates higher returns in periods where economic uncertainty is low.
New research papers related to existing premium strategies:
#198 – Exploiting Term Structure of VIX Futures
#241 – Trading VIX ETFs
Mixon, Onur: Volatility Derivatives in Practice: Activity and Impact
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2554745
Abstract:
We use unique regulatory data to examine open positions and activity in both listed and OTC volatility derivatives. Gross vega notional outstanding for index variance swaps is over USD 2 billion, with dealers short vega in order to supply the long vega demand of asset managers. For maturities less than one year, VIX futures are far more actively traded and have a higher notional amount outstanding than S&P 500 variance swaps. To the extent that dealers take on risk when facilitating trades, we estimate that the long volatility bias of asset managers puts upward pressure on VIX futures prices. Hedge funds have offset this potential impact by actively taking a net short position in nearby contracts. In our 2011â€2014 sample, the net impact added less than half a volatility point, on average, to nearby VIX futures contracts but added between one and two volatility points for contracts in less liquid, longerâ€dated parts of the curve. We find no evidence that this price impact forces VIX futures outside noâ€arbitrage bounds.
#237 – Dispersion Trading
Faria, Kosowski: The Correlation Risk Premium: Term Structure and Hedging
http://arno.uvt.nl/show.cgi?fid=135008
Abstract:
As the recent financial crisis has shown, diversification benefits can suddenly evaporate when correlations unexpectedly increase. We analyse alternative measures of correlation risk and their term structure, based on S&P500 correlation swap quotes, synthetic correlation swap rates estimated from option prices and the CBOE Implied Correlation Indices. An analysis of unconditional and conditional correlation hedging strategies shows that only some conditional correlation hedging strategies add value. Among the conditional hedge strategy’s conditioning variables we find that the level of the correlation risk factor and dispersion trade returns deliver the best results, while the CBOE Implied Correlation Indices perform poorly.
#237 – Dispersion Trading
Maze: Dispersion Trading in South Africa: An Analysis of Profitability and a Strategy Comparison
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2398223
Abstract:
A dispersion trade is entered into when a trader believes that the constituents of an index will be more volatile than the index itself. The South African derivatives market is fairly advanced, however it still experiences inefficiencies and dispersion trades have been known to perform well in inefficient markets. This paper tests the South African market for dispersion opportunities and explores various methods of executing these trades. The South African market shows positive results for dispersion trading; namely short-term reverse dispersion trading. Call options and Cross-Sectional Volatility (CSV) swaps are also tested. CSV swaps performed poorly whereas call options experienced annual returns well above the market.
