Does the S&P 500 implied volatility index (VIX) exhibit systematic behaviors by day of the week, around turn-of-the-month (TOTM) or around options expiration (OE)? If so, are the behaviors exploitable? Using daily closing levels of VIX since January 1990, daily opening levels of VIX since January 1992 and daily reverse split-adjusted opening and closing levels of iPath S&P 500 VIX Short-Term Futures ETN (VXX) since February 2009, all through early July 2015, we find that: Keep Reading
July 27, 2015
What is the scope of research on gold as an investment? In their July 2015 paper entitled “The Financial Economics of Gold – A Survey”, Fergal O’Connor, Brian Lucey, Jonathan Batten and Dirk Baur review the body of formal research on gold from the perspective of an investor. They start with the following background topics: how gold markets operate; physical gold demand and supply; and, gold mine economics. They then address gold as an investment as follows: portfolio diversification with gold; gold as a safe haven; gold in comparison to other precious metals; relationships between gold and currencies; mining stocks and exchange-traded funds (ETF) as gold substitutes; interaction of gold and oil; gold market efficiency; gold price bubbles, interactions of gold with inflation and interest rates; and, behavioral aspects of gold investing. They note consistencies and inconsistencies of research findings within topics. In reviewing this body of research, they note that: Keep Reading
July 24, 2015
Below is a weekly summary of our research findings for 7/20/15 through 7/24/15. These summaries give you a quick snapshot of our content the past week so that you can quickly decide what’s relevant to your investing needs.
The “Simple Asset Class ETF Value Strategy” seeks diversification across a small set of asset class exchanged-traded funds (ETF), plus a monthly tactical edge from potential undervaluation of three risk premiums:
- Term – monthly difference between the 10-year Constant Maturity U.S. Treasury note (T-note) yield and the 3-month Constant Maturity U.S. Treasury bill (T-bill) yield.
- Credit – monthly difference between the Moody’s Seasoned Baa Corporate Bonds yield and the T-note yield.
- Equity – monthly difference between S&P 500 operating earnings yield and the T-note yield.
Premium valuations are relative to historical averages. How might this strategy react to increases in the Federal Funds Rate (FFR)? Using end-of-month values of the three risk premiums, FFR, total 12-month U.S. inflation and core 12-month U.S. inflation during January 1990 (limited by availability of specific FFR targets) through June 2015 (306 months), we find that: Keep Reading
July 23, 2015
What are current implications of cyclically adjusted price-earnings ratios (CAPE, P/E10 or Shiller PE), stock index level divided by average real earnings over the past ten years, across country equity markets worldwide? In his July 2015 paper entitled “CAPE around the World: Update 2015 – Return Differences and Exchange Rate Movements”, Joachim Klement analyzes expected returns in local currencies for equity markets around the world based on an adjusted P/E10. His adjustment accounts for economic conditions in each country via regression of local P/E10 versus real GDP growth, real per capita GDP growth, real interest rate and inflation. He also examines interactions among exchange rate movements, adjusted P/E10s and expected returns. Using stock index level, P/E10, economic data and exchange rate versus the U.S. dollar for 20 developed and 18 emerging equity markets as available through June 2015, he finds that: Keep Reading
Has (hypothetical) equity factor investing worked as well in recent years as indicated in past studies? In his July 2015 paper entitled “Factor Investing Revisited”, David Blitz updates his prior study quantifying the performance of allocations to U.S. stocks based on three factor premiums: (1) value (high book-to-market ratio); (2) momentum (high return from 12 months ago to one month ago); and, (3) low-volatility (low standard deviation of total returns over the last 36 months). He considers two additional factor allocations: (4) operating profitability (high return on equity); and, (5) investment (low asset growth). He specifies each factor portfolio as the 30% of U.S. stocks with market capitalizations above the NYSE median that have the highest expected returns, reformed monthly for momentum and low-volatility and annually for the other factors. He considers both equal-weighted and value-weighted portfolios for each factor. He also summarizes recent research on the role of small-capitalization stocks, factor timing, long-only versus long-short portfolios, applicability to international stocks and applicability to other asset classes. Using value, momentum, profitability and investment factor portfolio returns from Kenneth French’s library and low-volatility portfolio returns as constructed from a broad sample of U.S. stocks during July 1963 through December 2014, he finds that: Keep Reading
Can traders use S&P 500 Implied Volatility Index (VIX) options to exploit predictability in behaviors of underlying VIX futures. In his June 2015 paper entitled “Trading the VIX Futures Roll and Volatility Premiums with VIX Options”, David Simon examines VIX option trading strategies that:
- Buy VIX calls when VIX futures are in backwardation (difference between the front VIX futures and VIX, divided by the number of business days until expiration of the VIX futures, is greater than +0.1 VIX futures point).
- Buy VIX puts when VIX futures are in contango (difference between the front VIX futures and VIX, divided by the number of business days until expiration of the VIX futures, is less than -0.1 VIX futures point).
- Buy VIX puts when the VIX options-futures volatility premium (spread between VIX option implied volatility and lagged 10-trading day VIX futures volatility adjusted for number of trading days to expiration) is greater than 10%.
He measures trade returns for a holding period of five trading days, with entry and exit at bid-ask midpoints. An ancillary analysis relevant to strategy profitability looks at hedged returns on VIX options to determine whether they are overpriced: (1) generally; and, (2) for the top 25% of VIX options-futures volatility premiums. Using daily data for VIX options data and for VIX futures (nearest contract with at least 10 trading days to expiration) during January 2007 through March 2014, he finds that: Keep Reading
“Effects of Execution Delay on Simple Asset Class ETF Momentum Strategy” investigates how delaying signal execution affects strategy performance. How does execution delay affect the performance of the Best Value and Weighted versions of the “Simple Asset Class ETF Value Strategy” (SACEVS)? These strategies each month allocate funds to the following asset class exchange-traded funds (ETF) according to valuations of term, credit and equity risk premiums, or to cash if no premiums are undervalued:
To investigate, we compare 21 variations of each strategy that all use end-of-month (EOM) to determine the asset allocations but shift execution from the baseline EOM+1 close to subsequent closes up to EOM+21. For example, an EOM+5 variation uses an EOM cycle to determine allocations but delays execution until the close five trading days after EOM. Using daily dividend-adjusted closes for the above ETFs and daily yields for Cash during August 2002 through June 2015 (154 months), we find that: