We are continuing in our short series of articles about calendar / seasonal trading. The main focus of this paper is to show that the well-working calendar / seasonal anomalies can be refined. The aim is to find the right factors and find a way how to combine them in a search for profit from the practitioner’s point of view. Based on our previous research, calendar anomalies are profitable, but there is a possible way how to enhance their performance. This can be done by employing momentum strategies. By assigning a weight to assets from a diversified set according to their momentum value, it is possible to find a profitable asset during various global market conditions. Moreover, a trend factor is used to ensure that when market conditions are not favorable, the strategy will not trade. Such addition is a typical approach used for reducing maximal draw-downs. Finally, since this paper is written from the practitioner’s point of view, we are assuming some model transaction costs and examine the strategy in their presence.

No doubt, the correct datasets are the key when one does some analysis in the financial markets. Nowadays, futures contracts are widely spread and popular among practitioners. However, each delivery month is connected with a different price where the price of the underlying asset should stand at a given date in the future (the expiration date). The industry standard for backtesting futures strategies is to construct one data sequence from a stream of contracts. Our short article shows the importance of choosing the correct methodology for building continuous futures contracts data series…

We have a new Youtube video + online presentation for all people who liked our short article about the commodity strategy which can be used as a hedge / diversification during bear markets …

Youtube video:

Online presentation:

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We at Quantpedia are continually building a database of ideas for quantitative trading strategies derived out of the academic research papers. Motivated by the recent fall of the S&P500 index at the end of 2018, we have added a new filtering field into our Screener, which you can use to find strategies that can be utilized as a hedge/diversification to equity market risk factor during bear markets. We would like to present one strategy that is profitable itself, but with an added value of negative correlation with the equity market, to be able to perform in the desired way also during the " bad" times.

The strategy we would be talking about can be found in our database under the name #281 – Skewness Effect in Commodities and is built on a research paper written by Fernandez-Perez, Frijns, Fuertes and Miffre – The Skewness of Commodity Futures Returns. Guys at AlphaArchitect have been really generous and they have provided a space for us to write a short article in which we 1) briefly discuss the lottery effect, 2) we discuss the research on this topic in the context of commodities, and 3) we conduct an independent replication effort of the commodity lottery effect identified in academic research.

Authors: Vojtko, Padysak

Title: Skewness Effect in Commodities

Link: https://alphaarchitect.com/2019/05/30/skewness-effect-in-commodities/

Shortly:

"Economies and markets have their seasonalities and cyclicality, where bull markets alternate with bear markets. Bull markets are connected with particularly good performance of the stocks and profiting investors. However on the other hand, during the bear markets, investors tend to lose in the falling equity market. Therefore, during these stressful times, it might be better for practitioners to invest in a portfolio that is negatively correlated with the equity market to gain profit instead of counting loses.

There is strong evidence that investors have a preference for lottery-like assets (the assets that have a relatively small probability of a large payoff or in other words, big skewness). Therefore, it should be profitable to not play the lottery, but rather be “the lottery ticket issuer“ by shorting the commodities with high skewness and going long commodities with low skewness. Additionally, commodities as an asset class are quite distinct from equities and therefore they can often be used as a diversifier to equities.

Clearly, the strategy is profitable, a dollar invested in 1991 would result in more than 9 dollars by 2019, which results in a yearly performance of nearly 8,5%. Moreover, the risk of the strategy is relatively low, with the maximal drawdown of around 16 %, which results in a return to a drawdown ratio of slightly more than 0,5.

Our research suggests that the performance of the equity market represented by the S&P500 index is negatively correlated with the performance of the skewness strategy. Therefore, if the equity market performs badly, our strategy should be still profitable.

What is more important, if we would look upon the worst months of S&P500 index (blue bars) and compare it with the performance of the strategy (orange bars), we would see the performance of the suggested strategy is at most times positive and therefore the investor would be able to hedge his equity portfolio.

To sum it up, the lottery anomaly in commodities is alive and performs in a desirable way also in the recent period. Moreover, the profitable strategy based on this anomaly could also serve as a hedge against equities and offer a profitable possibility to invest during times when equities are in bear markets.

Authors:
Radovan Vojtko, CEO, Quantpedia.com
Matus Padysak, Analyst, Quantpedia.com

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Are you looking for more strategies to read about? Check http://quantpedia.com/Screener

Do you want to see the performance of trading systems we described? Check http://quantpedia.com/Chart/Performance

Do you want to know more about us? Check http://quantpedia.com/Home/About

Follow us on:

Facebook: https://www.facebook.com/quantpedia/

Twitter: https://twitter.com/quantpedia

Despite the fact that the economic theory states that financial markets are efficient and investors are rational, a large amount of research is about anomalies, where the result is different from the theoretical expectation. At Quantpedia, we deal with anomalies in the financial markets and we have identified more than 500 attractive trading systems together with hundreds of related academic papers.

This article should be a case study of some strategies that are listed in our Screener, with an aim to present a possible usage of strategies in our database. Moreover, we have extended the backtesting period and we show that the strategies are still working and have not diminished. This blog also should serve as a case study how to use the Quantpedia’s database itself; therefore the choice of strategies was not obviously random and strategies were filtered by given criteria, however, every strategy is listed in the “free“ section, and therefore no subscription is needed.

Dear readers,

Equity markets have once again entered a high volatility regime at the end of the year 2018. Risk of an economic slowdown increases and investors and traders are looking for  trading strategies which can perform well in such uncertain times.

We at Quantpedia can help with that!

I am really excited to give you an opportunity to work with a new filtering field in our Screener, which you can use to find  strategies that can be utilized as a hedge/diversification to equity market risk factor during bear markets.

Come and find your new hedge!

Team of Quantpedia.com