New strategies:
#183 – Optimized Currency Portfolios
Period of rebalancing: Monthly
Markets traded: currencies
Instruments used for trading: CFDs, futures, swaps, forwards
Complexity: Very complex strategy
Bactest period: 1996 – 2010
Indicative performance: 33.54%
Estimated volatility: 23.89%
Source paper:
Barroso, Santa-Clara: Beyond the Carry Trade: Optimal Currency Portfolios
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2041460
Abstract:
A well-diversiffied equal-weighted carry trade portfolio has shown puzzling investment performance in the floating exchange rate era, producing a Sharpe ratio of 0.9 that is more than double the 0.4 of the US stock market. So far there is no consensus risk-based expanation for this result. This research deepens the puzzle in showing that optimal currency portfolios formed on the basis of interest rate variables, momentum, long-term reversal, the current account, and the real exchange rate have an even more impressive performance, with Sharpe ratios as high as 1.4 out of sample.
#184 – Timing Carry Trade
Period of rebalancing: Monthly
Markets traded: currencies
Instruments used for trading: CFDs, futures, swaps, forwards
Complexity: Complex strategy
Bactest period: 1985 – 2011
Indicative performance: 12.60%
Estimated volatility: 10.00%
Source paper:
Bakshi, Panayotov: Predictability of Currency Carry Trades and Asset Pricing Implications
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1977642
Abstract:
This paper studies the time-series predictability of currency carry trades, constructed by selecting currencies to be bought or sold against the U.S. dollar, based on forward discounts. Changes in a commodity index, currency volatility and, to a lesser extent, a measure of liquidity predict in-sample the payoffs of dynamically re-balanced carry trades, as evidenced by individual and joint p-values in monthly predictive regressions at horizons up to six months. Predictability is further supported through out-of-sample metrics, and a predictability-based decision rule produces sizeable improvements in the Sharpe ratios and skewness profile of carry trade payoffs. Our evidence also indicates that predictability can be traced to the long legs of the carry trades and their currency components. We test the theoretical restrictions that an asset pricing model, with average currency returns and the mimicking portfolio for the innovations in currency volatility as risk factors, imposes on the coefficients in predictive regressions.
New research papers related to existing strategies:
#1 – Asset Class Trend Following
#137 – Trendfollowing in Futures Markets
#143 – Momentum and Trendfollowing in Country Equity Indexes
#144 – Trendfollowing Effect in Stocks
Wojtow: Theoretical basis and a practical example of trend following
http://www.naaim.org/wp-content/uploads/2012/05/theoretical_basis__practical_example_of_trend_following_Lukasz_Wojtow.pdf
Abstract:
The purpose of this paper is to provide a usable framework for detecting, measuring and exploiting trends in financial markets. Using technical analysis (TA) indicators we challenge Efficient Market Hypothesis (EMH) that says that markets are random and that is not possible to regularly outperform a passive investment strategy.
#26 – Value (Book-to-Market) Anomaly
#37 – Net Current Asset Value Effect
#181 – Catching "Falling Knife" Stocks
Damodaran: Value Investing: Investing for Grown Ups?
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2042657
Abstract:
Value investors generally characterize themselves as the grown ups in the investment world, unswayed by perceptions or momentum, and driven by fundamentals. While this may be true, at least in the abstract, there are at least three distinct strands of value investing. The first, passive value investing, is built around screening for stocks that meet specific characteristics – low multiples of earnings or book value, high returns on projects and low risk – and can be traced back to Ben Graham’s books on security analysis. The second, contrarian investing, requires investing in companies that are down on their luck and in the market. The third, activist value investing, involves taking large positions in poorly managed and low valued companies and making money from turning them around. While value investing looks impressive on paper, the performance of value investors, as a whole, is no better than that of less “sensible” investors who chose other investment philosophies and strategies. We examine explanations for why "active" value investing may not provide the promised payoffs.
