New strategies:
#313 – Nearness to 52-Week Low Strategy
Period of rebalancing: monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1962-2014
Indicative performance: 7.67%
Estimated volatility: 11.55%
Source paper:
Chen, Yu: Nearness to the 52-Week High and Low Prices, Past Returns, and Average Stock Returns
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2797149
Abstract:
This study examines the interactions between trading strategies based on the nearness to the 52-week high, the nearness to the 52-week low, and past returns. We offer evidence that the nearness to the 52-week low has predictive power for future average returns. Our results also reveal that the nearness to the 52-week high as well as to the 52-week low and past returns each have certain exclusive unpriced information content in the cross-sectional pricing of stocks. Moreover, a trading strategy based on the nearness to the 52-week low provides an excellent hedge for the momentum strategy, thereby nearly doubling the Sharpe ratio of the momentum strategy.
New research papers related to existing strategies:
#12 – Pairs Trading with Stocks
Do, Faff: Cointegration and Relative Value Arbitrage
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2785045
Abstract:
This paper examines relative value arbitrage in the US equity markets using cointegration. We find that the general presence of cointegration, which implies forecastable portfolio prices, generally does not entail profitable opportunities. However, potentially profitable arbitrage exists for pairs of stocks that are cointegrated approximately on a one-to-one basis. Over period 1962-2013, such pairs generate average portfolio returns of about 100 bps per month, experience 71% probability of convergence and outperform pairs that are selected using the conventional method of minimizing price distance. This finding is consistent with cointegration representing statistical substitutes but only for a subset are they also close economic substitutes, the ultimate target of relative value arbitrage.
#97 – Half-day Reversal
Kakushadze: 4-Factor Model for Overnight Returns
http://arxiv.org/pdf/1410.5513v2.pdf
Abstract:
We propose a 4-factor model for overnight returns and give explicit definitions of our 4 factors. Long horizon fundamental factors such as value and growth lack predictive power for overnight (or similar short horizon) returns and are not included. All 4 factors are constructed based on intraday price and volume data and are analogous to size (price), volatility, momentum and liquidity (volume). Historical regressions a la Fama and MacBeth (1973) suggest that our 4 factors have sizable serial t-statistic and appear to be relevant predictors for overnight returns. We check this by using our 4-factor model in an explicit intraday mean-reversion alpha.
Two additional related research papers have been included into existing free strategy reviews during last 2 week:
Related to all CTA strategies:
Foran, Hutchinson, McCarthy, O'Brian: Just a One Trick Pony? An Analysis of CTA Risk and Return
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2791960
Abstract:
Recently a range of alternative risk premia products have been developed promising investors hedge fund/CTA like returns with higher liquidity, transparency and relatively low fees. The attractiveness of these products rests on the assumption that they can deliver similar returns. Using a novel reporting bias free sample of 3,419 CTA funds as a testing ground, our results suggest this assumption is questionable. We find that CTAs are not a homogenous group. We identify eight different CTA sub-strategies, each with very different sources of return and low correlation between sub-strategies. When we specify recently identified alternative risk premia as factors to examine the sources of return of CTAs, we find that these premia fail to explain between 56% and 86% of returns. Our results for CTAs suggest that while these new products may deliver on liquidity, transparency and fees, investors expecting hedge fund CTA – like returns may be disappointed.
A very interesting paper related to fundamentals of momentum anomaly:
Engelberg, Le, Williams: Stock Market Anomalies and Baseball Cards
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2798951
Abstract:
We show that the market for baseball cards exhibits anomalies that are analogous to those that have been documented in financial markets, namely, momentum, price drift in the direction of past fundamental performance, and IPO under performance. Momentum profits are higher among active players than retired players, and among newer sets than older sets. Regarding IPO under performance, we find that newly issued rookie cards under perform newly issued cards of veteran players, and that newly issued sets under perform older sets. Our evidence is consistent with the predictions of Hong and Stein (1999) and Miller (1977).
