Recent corona-crisis turbulence brought us many unexpected things, and one observation is connected with the fixed-income market. The conventional wisdom says that there is a flight to liquidity during troubled times and crises. Traditionally, liquid assets are US Treasuries or high-quality corporate bonds. Therefore, in theory, the pandemic should have been connected with buying pressure of high-quality liquid assets. However, as shown by a novel, insightful research from Ha, Xiao and Zeng, the exact opposite held. There was a very unusual sellout of liquid assets such as high quality fixed income as mutual funds tried to meet their redemption requests.

Authors: Yiming Ma, Kairong Xiao and Yao Zeng

Title: Mutual Fund Liquidity Transformation and Reverse Flight to Liquidity

Summer is in full swing; therefore, we have prepared some “summer reading” for you. Ten new Quantpedia Premium strategies have been added into our database, and seven new related research papers have been included in existing Premium strategies during last month.

Additionally, we have produced 15 new backtests written in QuantConnect code. Our database currently contains nearly 330 strategies with out-of-sample backtests/codes.

Also, five new blog posts, that you may find interesting, have been published on our Quantpedia blog:

During past months we made a set of articles analyzing the performance of equity factors and selected systematic strategies during coronavirus crisis. These articles were short-ranged with data only from the start of the year 2020, which is enough for the purpose of the quick blog posts, but very short-sighted to see the nature of these strategies. Therefore, we expanded the time range by 20 years. For a better understanding of hedge possibilities of these strategies, we have added a comparison to essential safe-haven assets, not only to equities.

Whenever traders want to assess the stock market’s mood, there is one really popular and useful index the most of them turn to. Yes, you guessed it right, it’s CBOE’s VIX Index. And which index can we use if we want to determine the mood of the cryptocurrencies? We can turn to a paper written by Fabian Woebbeking, which offers the methodology to compute two cryptocurrency volatility indexes (CVX & CVX76). The CVX and CVX76 Indexes also extract the market’s expectation of future volatility from option prices, but from options on the Bitcoin. The research suggests that the cryptocurrency option market has finally reached a sufficient market size to extract stable cryptocurrency volatility information.

Authors: Fabian Woebbeking

Title: Cryptocurrency Volatility Markets

What will happen if we mix ESG scoring with price momentum? Can we improve simple ESG investing strategy?

The pure price momentum can be combined with ESG scores using a Knapsack algorithm. Knapsack algorithm is a well-known mathematical problem of optimization, and in the case of momentum and ESG, can be used to make the momentum portfolios significantly more responsible, with lower volatility and better risk-adjusted return. The second option is to make the ESG portfolio substantially more profitable by using Knapsack algorithm to construct high ESG portfolio with large momentum. The approach resulted in a strategy with high ESG score and compared to pure momentum or momentum-ESG strategy, with significantly reduced volatility. Therefore, the ESG-momentum strategy has the best risk-adjusted return, the lowest drawdown, the lowest volatility and the most consistent returns.

The bear markets were and surely would be present in the equities in the future. While many fear them, experienced investors accept that the growth of the equity market cannot be constant and that inherent equity risk often manifests as a painful market drawdown. When someone designs a strategy, it is a general practice to check its performance during such downturns. Therefore, we can recommend an interesting novel research paper by Paul Geertsema and Helen Lu. The selected paper analyzes the risk of the most common equity factors and plots their over- or under-performance during multiple crisis periods since the Vietnam war until the COVID-19.

Authors: Paul Geertsema, Helen Lu

Title: The Risk in Risk Factors