New related paper to #5 - FX Carry Trade and #8 - FX Momentum Wednesday, 1 April, 2015

#5 - FX Carry Trade
#8 - FX Momentum

Authors: Olszweski, Zhou

Title: Strategy diversification: Combining momentum and carry strategies within a foreign exchange portfolio

Link: http://apps.olin.wustl.edu/faculty/zhou/O_Z_JHDF_2014.pdf

Abstract:

Hedge funds, such as managed futures, typically use two different types of trading strategies: technical and macro/fundamental. In this article, we evaluate the impact of combining the two strategies, and focus on, in particular, two common foreign exchange trading strategies: momentum and carry. We find evidence that combining the strategies offers a significant improvement in risk-adjusted returns. Our analysis, which uses data spanning 20 years, highlights the potential benefits of achieving strategy-level diversification.

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New related paper to #12 - Pairs Trading with Stocks and #55 - Pairs Trading with Country ETFs Thursday, 26 March, 2015

#12 - Pairs Trading with Stocks
#55 - Pairs Trading with Country ETFs

Authors: Leung, Li

Title: Optimal Mean Reversion Trading with Transaction Costs and Stop-Loss Exit

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2222196

Abstract:

Motivated by the industry practice of pairs trading, we study the optimal timing strategies for trading a mean-reverting price spread. An optimal double stopping problem is formulated to analyze the timing to start and subsequently liquidate the position subject to transaction costs. Modeling the price spread by an Ornstein-Uhlenbeck process, we apply a probabilistic methodology and rigorously derive the optimal price intervals for market entry and exit. As an extension, we incorporate a stop-loss constraint to limit the maximum loss. We show that the entry region is characterized by a bounded price interval that lies strictly above the stop-loss level. As for the exit timing, a higher stop-loss level always implies a lower optimal take-profit level. Both analytical and numerical results are provided to illustrate the dependence of timing strategies on model parameters such as transaction cost and stop-loss level.

New related paper to #44 - Paired Switching Monday, 23 March, 2015

#44 - Paired Switching

Authors: Schizas, Thomakos

Title: Market timing using asset rotation on exchange traded funds: a meta-analysis on trading performance

Link: http://businessperspectives.org/journals_free/imfi/2013/imfi_en_2013_02cont_Schizas.pdf

Abstract:

The ultimate goal of any “paper” investment strategy is to achieve real-life profitability. This paper measures the performance of a trading rule based on the relative pricing and relative volatility of a rotation strategy between two assets, using data from passive ETFs. To avoid problems of pair selection we work with meta-data obtained after the evaluation of a large number of 351 pairs of ETFs. In this way the authors analyze the performance of the proposed strategy on the cross-section of different ETFs. The results show that rotation trading, as applied in this paper, offers advantages even when the simplest model is used in generating trading signals. Furthermore, the authors find that the differences in the actual mean returns (over the evaluation period), the correlation of the pair components and to (a lesser extend) the volatilities of the ETFs can explain the success of the rotation strategies.

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New related paper to #100 - Trading WTI/BRENT Spread Thursday, 19 March, 2015

Related research paper has been included into existing free strategy review.

#100 - Trading WTI/BRENT Spread

Authors: Lubnau

Title: Spread trading strategies in the crude oil futures market

Link: http://econstor.eu/bitstream/10419/96520/1/783913591.pdf

Abstract:

This article explores whether common technical trading strategies used in equity markets can be employed profitably in the markets for WTI and Brent crude oil. The strategies tested are Bollinger Bands, based on a mean-reverting hedge portfolio of WTI and Brent. The trading systems are tested with historical data from 1992 to 2013, representing 22 years of data and for various specifications. The hedge ratio for the crude oil portfolio is derived by using the Johansen procedure and a dynamic linear model with Kalman filtering. The significance of the results is evaluated with a bootstrap test in which randomly generated orders are employed. Results show that some setups of the system are able to be profitable over every five-year period tested. Furthermore they generate profits and Sharpe ratios that are significantly higher than those of randomly generated orders of approximately the same holding time. The best results with some Sharpe ratios in excess of three, are obtained when a dynamic linear model with Kalman filtering and maximum likelihood estimates of the unknown variance of the state equation is employed to constantly update the hedge ratio of the portfolio. The results indicate that the crude oil market may not be weak-form efficient.

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New related paper to #33 - Post-Earnings Announcement Effect Monday, 16 March, 2015

Related research paper has been included into existing free strategy review.

#33 - Post-Earnings Announcement Effect

Authors: Kwon, Kim

Title: Investment Horizon of Shareholders and Post-Earnings-Announcement Drift

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2545189

Abstract:

We hypothesize that post-earnings-announcement drift (PEAD) is caused by underreaction of long-term investors since they do not pay much attention to short-term events. Consistent with the hypothesis, empirical observations show that stocks mostly held by long-term investors exhibit strong PEAD, while stocks mostly held by short-term investors does not. The results are still robust even after transaction costs, investor recognition, temporal inattention, and reversal in earnings surprises are controlled for.

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