Factor Trends and Cycles

30.May 2023

Bearish trends or deep corrections in international equity markets starting in 2022 and rising interest rates worldwide brought investors’ attention back to not only once-proclaimed dead factor investing. From long-run and short run, during different market cycles, different factors behave differently. What’s fortunate is that it is pretty predictable to some extent. Andrew Ang, Head of Factor Investing Strategies at BlackRock, in his Trends and Cycles of Style Factors in the 20th and 21st Centuries (2022), used Hodrick-Prescott (HP) filter and spectral analysis to investigate different models to draw some general conclusions on most-widely used factors. We will take a look at a few of quite the most interesting ones of them.

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An Evaluation of the Skewness Model on 22 Commodities Futures

26.May 2023

Skewness is one of the less-known but practical measures from statistics that can be used in trading. It is defined as a measure of the asymmetry of the probability distribution of a random variable around its mean. The goal of this analysis is to explore the commodity skewness trading strategy and perform the battery of robustness tests to see how sensitivity analysis changes overall results regarding performance, volatility, and Sharpe ratios.

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Exploration of the Arbitrage Co-movement Effect in ETFs

23.May 2023

We continue our short series of articles dedicated to the exploration of trading strategies that derive their functionality from the deep understanding of how Exchange Trading Funds (ETFs) work. In our first post, we discussed how we could use the ETF flows to predict subsequent daily ETF performance. In today’s article, we will analyze how we can use the information about the sensitivity of individual stocks to the ETF arbitrage activity to build a profitable equity factor trading strategy.

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Anomaly Discovery and Arbitrage Trading

19.May 2023

Today, we will look closer into the hood of life expectancy of investment strategies and try to answer the critical question on which many, in some sense, if not all, trading strategies are built: what happens with anomalies after their discovery? The paper’s authors, with the sweet, simple name Anomaly Discovery and Arbitrage Trading, analyze a stylized model of anomaly discovery, which has implications for both asset prices and arbitrageurs’ trading. Their original research produced an arbitrageur-based asset pricing model that shows that discovering an anomaly reduces the correlation between the returns of its long- and short-leg portfolios: HFs (professional arbitrageurs) use to increase (unwind) such trades when their wealth increases (decreases), further supporting the view that the discovery effects work through arbitrage trading. This effect is more substantial when arbitrageurs’ wealth is more volatile.

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How to Rebalance Smart Beta Strategies Smarter

17.May 2023

The topic of Smart-Beta is widely recognized, and we cover, monitor, and inform about its developments. The analyzed piece is about the importance of the correct rebalancing strategy and is kindly provided by Research Affiliates. According to a recent research article, investors should re-consider rebalancing with turnover constraint only those stocks that have the strongest signal. Prioritizing trades in stocks that are the farthest removed from the portfolio selection threshold is likely to minimize the expected need for additional trading.

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Comparison of Commodity Momentum Strategy in the U.S. and Chinese Markets

12.May 2023

The commodity momentum strategy is a crucial driving force behind Commodity Trading Advisor (CTA) strategies, as it capitalizes on the persistence of price trends in various commodity markets. By identifying and exploiting these trends, CTAs can achieve robust returns and diversification benefits. In their new paper, John Hua FAN and Xiao QIAO (February 2023) present their perspective and understanding of cross-country and cross-sector influences on the behavior of commodity momentum beyond established commodity fundamentals focusing on U.S. and China markets.

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