Fractal mathematics used to explain #14 - Momentum Effect in stocks Wednesday, 22 July, 2015

#14 - Momentum Effect in Stocks

Authors: Berghorn, Otto

Title: Mandelbrot Market-Model and Momentum

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2620112

Abstract:

Mandelbrot has significantly contributed in many ways to the area of finance. He was one of the first who criticized the oversimplifications centered around the early stochastic process models of Bachelier utilizing normal distribution. In his view, markets were fractal and much wilder than classical theory suggests. Additionally, he was a profound critic of the efficient markets hypothesis. Particularly, his work of fractional Brownian motion showed that the independence claim made by that hypothesis is not valid; in addition, he proposed a multi-fractal asset model to reconcile for effects observed in the market. However, it is also known that his vision of fractal markets used fractal trends. Recently, we were able to show that the scaling behaviour of trends, as defined by a specific trend decomposition using wavelets, are the root cause for the momentum effect. Additionally, we were able to show that these trends have fractal characteristics. In this work, we will revisit Mandelbrot’s vision of fractal markets. We will show that the momentum effect discussed heavily in literature can be modeled by the so-called Mandelbrot Market-Model. Additionally, this model shows, from the risk side, that markets are wilder because of trend structures compared with classical models. In conclusion, we derive what Mandelbrot always knew: There are no efficient markets.

Notable quotations from the academic research paper:

...

 

Interesting research paper sheds light on multiple anomalies Thursday, 16 July, 2015

#14 - Momentum Effect in Stocks
#25 - Small Capitalization Stocks Premium Anomaly    
#26 - Value (Book-to-Market) Anomaly
#38 - Accrual Anomaly
#52 - Asset Growth Effect

Authors: Fan, Opsal, Yu

Title: Equity Anomalies and Idiosyncratic Risk Around the World

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2611047

Abstract:

In this study, we examine how idiosyncratic risk is correlated with a wide array of anomalies, including asset growth, book-to-market, investment-to-assets, momentum, net stock issues, size, and total accruals, in international equity markets. We use zero-cost trading strategy and multifactor models to show that these anomalies produce significant abnormal returns. The abnormal returns vary dramatically among different countries and between developed and emerging countries. We provide strong evidence to support the limits of arbitrage theory across countries by documenting a positive correlation between idiosyncratic risk and abnormal return. It suggests that the existence of these well-known anomalies is due to idiosyncratic risk. In addition, we find that idiosyncratic risk has less impact on abnormal return in developed countries than emerging countries. Our results support the mispricing explanation of the existence of various anomalies across global markets.

Notable quotations from the academic research paper:

...

New academic paper related to #12 - Pairs Trading with Stocks Thursday, 9 July, 2015

#12 - Pairs Trading with Stocks

Authors: Goncu, Akyildrim

Title: Statistical Arbitrage with Pairs Trading

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2610064

Abstract:

We analyse statistical arbitrage with pairs trading assuming that the spread of two assets follows a mean-reverting Ornstein-Uhlenbeck process around a long-term equilibrium level. Within this framework, we prove the existence of statistical arbitrage and derive optimality conditions for trading the spread portfolio. In the existence of uncertainty in the long-term mean and volatility of the spread, statistical arbitrage is no longer guaranteed. However, the asymptotic probability of loss can be bounded as a function of the standard error of the model parameters. The proposed framework provides a new filtering technique for identifying best pairs in the market. Empirical examples are provided for three pairs of stocks from the NYSE.

Notable quotations from the academic research paper:

...

Practical academic paper related to #100 - Trading WTI/BRENT Spread Monday, 6 July, 2015

#100 - Trading WTI/BRENT Spread

Authors: Donninger

Title: The Poverty of Academic Finance Research: Spread Trading Strategies in the Crude Oil Futures Market

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2617585

Abstract:
Harvey, Liu and Zhu argue that probably most of the Cross-Section of Returns literature is garbage. One can always try an additional factor and will find a significant Cross-Sectional result with enough trial and error. Lopez de Prado argues in a series of articles in a similar vein. Theoretically scientific results are falsifiable. Practically previous results and publications are checked only in rare occasions. Growth in a Time of Depth by Reinhart-Rogoff was the most influential economic paper in recent years. It was published in a top journal. Although the paper contained even trivial Excel-Bugs it took 3 years till the wrong results and the poor methodology was fully revealed. The reviewers did not check the simple spreadsheets. This paper analyzes a less prominent example about spread trading in the crude oil futures market by Thorben Lubnau. The author reports for his very simple strategy a long term Sharpe-Ratios above 3. It is shown that – like for Reinhart-Rogoff – one needs no sophisticated test statistics to falsify the results. The explanation is much simpler: The author has no clue of trading. He used the wrong data.

Notable quotations from the academic research paper:

...

New related paper to #118 - Time Series Momentum Effect Monday, 29 June, 2015

#118 - Time Series Momentum Effect

Authors: Georgopoulou, Wang

Title: The Trend is Your Friend: Time-Series Momentum Strategies Across Equity and Commodity Markets

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2618243

Abstract:
Using a dataset of 67 equity and commodity indices from 1969 to 2013, this study documents a significant time-series momentum effect across international equity and commodity markets. This paper further documents that international mutual funds have a tendency to buy instruments that have been performing well in recent months, but they do not systematically sell those that have been performing poorly in the same periods. We also find that a diversified long-short momentum portfolio realizes its largest profits in extreme market conditions, but the market interventions by central banks in recent years seem to challenge the performance of such portfolios.

Notable quotations from the academic research paper:

...