Momentum and mean reversion across national equity markets

From the abstract:

“Numerous studies have separately identified mean reversion and momentum. This paper considers these effects jointly. Our empirical model assumes that only global equity price index shocks can have permanent components. This is motivated in a production-based asset pricing context, given that production levels converge across developed countries. Combination momentum-contrarian strategies, used to select from among 18 developed equity markets at a monthly frequency, outperform both pure momentum and pure contrarian strategies. The results continue to hold after corrections for factor sensitivities and transaction costs. They reveal the importance of controlling for mean reversion in exploiting momentum and vice versa.”

“Momentum and mean reversion across national equity markets.” Ronald J. Balvers, Yangru Wu, 2005.

See paper here.

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Meeting on 9/3/17 at 5pm, San Francisco

Our next meeting is scheduled for 9/3/17 (Sunday) at 5pm in San Francisco on the 2nd floor lounge of the Marriott Marquis (780 Mission Street).  See here for more information about the venue. Once you enter the hotel, go to the 2nd floor using the escalator and you will see a lounge with sofas and tables. Feel free to send an email if you have trouble finding it.

We will be having a discussion on power laws. See here for paper.

Power laws, Pareto distributions and Zipf’s law

In previous sessions, we reviewed Mandelbrot’s market model, which postulates that a power law governs returns rather than a Gaussian process. The paper below explores how power laws arise so frequently in nature. From the abstract:

“When the probability of measuring a particular value of some quantity varies inversely as a power of that value, the quantity is said to follow a power law, also known variously as Zipf’s law or the Pareto distribution. Power laws appear widely in physics, biology, earth and planetary sciences, economics and finance, computer science, demography and the social sciences. For instance, the distributions of the sizes of cities, earthquakes, solar flares, moon craters, wars and people’s personal fortunes all appear to follow power laws. The origin of power-law behaviour has been a topic of debate in the scientific community for more than a century. Here we review some of the empirical evidence for the existence of power-law forms and the theories proposed to explain them.”

Power laws, Pareto distributions and Zipf’s law“, May 2006, M. E. J. Newman. Department of Physics and Center for the Study of Complex Systems, University of Michigan, Ann Arbor, MI 48109. U.S.A.

See here for the paper.

Meeting on 8/20/17 at 5pm, San Francisco

Our next meeting is scheduled for 8/20/17 (Sunday) at 5pm in San Francisco on the 2nd floor lounge of the Marriott Marquis (780 Mission Street).  See here for more information about the venue. Once you enter the hotel, go to the 2nd floor using the escalator and you will see a lounge with sofas and tables. Feel free to send an email if you have trouble finding it.

We will be having a discussion on an analysis of the size premium of small-cap and micro-cap stocks. See here for paper.

Size Matters, If You Control Your Junk

Yes, that is the actual title of the paper. And it actually has some meaningful, interesting results.

From the abstract:

“The size premium has been challenged along many fronts: it has a weak historical record, varies significantly over time, in particular weakening after its discovery in the early 1980s, is concentrated among micro-cap stocks, predominantly resides in January, is not present for measures of size that do not rely on market prices, is weak internationally, and is subsumed by proxies for illiquidity. We find, however, that these challenges are dismantled when controlling for the quality, or the inverse “junk”, of a firm. A significant size premium emerges, which is stable through time.”

“Size Matters, If You Control Your Junk”, Clifford Asness, Andrea Frazzini, Ronen Israel, Tobias Moskowitz, Lasse Pederson, Feb 2017

See here for paper.

Meeting on 8/6/17 in San Francisco, 5:00pm

Our next meeting is scheduled for 8/6/17 (Sunday) at 5pm in San Francisco on the 2nd floor lounge of the Marriott Marquis (780 Mission Street).  See here for more information about the venue. Once you enter the hotel, go to the 2nd floor using the escalator and you will see a lounge with sofas and tables. Feel free to send an email if you have trouble finding it.

Our agenda for next time:

  1. Continue discussion on wavelets.
  2. Discuss paper listed here.
  3. Discuss Mandelbrot’s book, “Misbehavior of Markets, A Fractal View of Turbulence”, Benoit Mandelbrot.

Feel free to comment below with your questions.

Application of Wavelets to estimate the Fractal Dimension of the S&P 500

from abstract:

“S&P 500 index data sampled at one-minute intervals over the course of 11.5 years (January 1989- May 2000) is analyzed, and in particular the Hurst parameter over segments of stationarity (the time period over which the Hurst parameter is almost constant) is estimated. An asymptotically unbiased and efficient estimator using the log-scale spectrum is employed. The estimator is asymptotically Gaussian and the variance of the estimate that is obtained from a data segment of N points is of order 1 N . Wavelet analysis is tailor made for the high frequency data set, since it has low computational complexity due to the pyramidal algorithm for computing the detail coefficients. This estimator is robust to additive non-stationarities, and here it is shown to exhibit some degree of robustness to multiplicative non-stationarities, such as seasonalities and volatility persistence, as well. This analysis shows that the market became more efficient in the period 1997-2000.” See here.

“Estimating the Fractal Dimension of the S&P 500 Index using Wavelet Analysis.” Erhan Bayraktar, H. Vincent Poor , K. Ronnie Sircar, June 2002; revised December 2003