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Currency Trading

Currency trading (forex or FX) offers investors a way to trade on country or regional fiscal/monetary situations and tendencies. Are there reliable ways to exploit this market? Does it represent a distinct asset class?

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Predicting Crypto-asset Returns with Past Returns-Volume

Do crypto-asset trading volumes usefully predict returns? In the August 2018 draft of their paper entitled “Trading Volume in Cryptocurrency Markets”, Daniele Bianchi and Alexander Dickerson investigate the power of crypto-asset trading volumes to predict future returns. They calculate volumes and returns based on either 12-hour or 24-hour intervals. They process these inputs as follows:

  • To detect volume abnormalities, they estimate its log deviation from trend over a rolling 21-interval window. To put different crypto-assets on an equal footing, they then standardized by dividing by its log standard deviation over the same window.
  • They measure past returns over the same interval, denominated in bitcoins, (thereby including Bitcoin only indirectly). To emphasize the most liquid exchanges, they weight returns by volume when aggregating.

To assess economic significance of findings, they double-sort crypto-assets first into two to four groups ranked by the return metric and then within each group into three or four subgroups ranked by the volume metric. Using intraday (10-minute) price and volume data for 26 crypto-assets from over 150 exchanges (90% of total crypto-asset market capitalization), each denominated in bitcoins, during January 1, 2017 through May 10, 2018, they find that:

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Are Managed Futures ETFs Working?

Are managed futures, as implemented by exchange-traded funds (ETF), attractive? To investigate, we consider three managed futures ETFs, all currently available:

  1. WisdomTree Managed Futures Strategy (WTMF).
  2. First Trust Morningstar Managed Futures Strategy (FMF).
  3. ProShares Managed Futures Strategy (FUT).

We focus on compound annual growth rate (CAGR), maximum drawdown (MaxDD) and correlation of returns with those of SPDR S&P 500 (SPY) as key performance statistics. We use Eurekahedge CTA/Managed Futures Hedge Fund Index (the index) as a benchmark. Using monthly returns for the three funds as available through August 2018, and contemporaneous monthly returns for the benchmark index and SPY, we find that: Keep Reading

Simple Currency ETF Momentum Strategy

Do exchange-traded funds (ETF) that track major currencies support a relative momentum strategy? To investigate, we consider the following four ETFs:

Invesco DB US Dollar Bullish (UUP)
Invesco CurrencyShares Euro Currency (FXE)
Invesco CurrencyShares Japanese Yen (FXY)
WisdomTree Chinese Yuan Strategy (CYB)

We each month rank these ETFs based on past return over lookback intervals ranging from one to 12 months. We consider portfolios of past winners reformed monthly based on Top 1 and on equally weighted (EW) Top 2 and Top 3 ETFs. The benchmark portfolio is the equally weighted combination of all four ETFs. We present findings in formats similar to those used for the Simple Asset Class ETF Momentum Strategy and the Simple Asset Class ETF Value Strategy. Using monthly adjusted closing prices for the currency ETFs during March 2007 (when three become available) through August 2018, we find that: Keep Reading

Asset Class ETF Interactions with the Yuan

How do different asset classes interact with the Chinese yuan-U.S. dollar exchange rate? To investigate, we consider relationships between WisdomTree Chinese Yuan Strategy (CYB) and the following exchange-traded fund (ETF) asset class proxies used in “Simple Asset Class ETF Momentum Strategy” (SACEMS) at a monthly measurement frequency:

PowerShares DB Commodity Index Tracking (DBC)
iShares MSCI Emerging Markets Index (EEM)
iShares MSCI EAFE Index (EFA)
SPDR Gold Shares (GLD)
iShares Russell 2000 Index (IWM)
SPDR S&P 500 (SPY)
iShares Barclays 20+ Year Treasury Bond (TLT)
Vanguard REIT ETF (VNQ)

Using monthly dividend-adjusted closing prices for CYB and the asset class proxies during May 2008 (when all ETFs are first available, limited by CYB) through July 2018 (123 months), we find that: Keep Reading

Asset Class ETF Interactions with the Yen

How do different asset classes interact with the Japanese yen-U.S. dollar exchange rate? To investigate, we consider relationships between Invesco CurrencyShares Japanese Yen (FXY) and the following exchange-traded fund (ETF) asset class proxies used in “Simple Asset Class ETF Momentum Strategy” (SACEMS) at a monthly measurement frequency:

PowerShares DB Commodity Index Tracking (DBC)
iShares MSCI Emerging Markets Index (EEM)
iShares MSCI EAFE Index (EFA)
SPDR Gold Shares (GLD)
iShares Russell 2000 Index (IWM)
SPDR S&P 500 (SPY)
iShares Barclays 20+ Year Treasury Bond (TLT)
Vanguard REIT ETF (VNQ)

Using monthly dividend-adjusted closing prices for FXY and the asset class proxies during February 2007 (when all ETFs are first available, limited by FXY) through July 2018 (123 months), we find that: Keep Reading

Asset Class ETF Interactions with the Euro

How do different asset classes interact with euro-U.S. dollar exchange rate ? To investigate, we consider relationships between Invesco CurrencyShares Euro Currency (FXE) and the following exchange-traded fund (ETF) asset class proxies used in “Simple Asset Class ETF Momentum Strategy” (SACEMS) at a monthly measurement frequency:

PowerShares DB Commodity Index Tracking (DBC)
iShares MSCI Emerging Markets Index (EEM)
iShares MSCI EAFE Index (EFA)
SPDR Gold Shares (GLD)
iShares Russell 2000 Index (IWM)
SPDR S&P 500 (SPY)
iShares Barclays 20+ Year Treasury Bond (TLT)
Vanguard REIT ETF (VNQ)

Using monthly dividend-adjusted closing prices for FXE and the asset class proxies during February 2006 (when all ETFs are first available, limited by DBC) through July 2018 (150 months), we find that: Keep Reading

Asset Class ETF Interactions with the U.S. Dollar

How do different asset classes interact with aggregate U.S. dollar valuation? To investigate, we consider relationships between Powershares DB US Dollar Index Bullish Fund (UUP) and the following exchange-traded fund (ETF) asset class proxies used in “Simple Asset Class ETF Momentum Strategy” (SACEMS) at a monthly measurement frequency:

PowerShares DB Commodity Index Tracking (DBC)
iShares MSCI Emerging Markets Index (EEM)
iShares MSCI EAFE Index (EFA)
SPDR Gold Shares (GLD)
iShares Russell 2000 Index (IWM)
SPDR S&P 500 (SPY)
iShares Barclays 20+ Year Treasury Bond (TLT)
Vanguard REIT ETF (VNQ)

Using monthly dividend-adjusted closing prices for UUP and the asset class proxies during March 2007 (when all ETFs are first available, limited by UUP) through July 2018 (137 months), we find that: Keep Reading

Crypto-asset Risks and Returns

How do the major crypto-assets (Bitcoin, Ripple, and Ethereum) stack up against conventional asset classes? In their August 2018 paper entitled “Risks and Returns of Cryptocurrency”, Yukun Liu and Aleh Tsyvinski apply standard tools of asset pricing to measure crypto-asset exposures to:

  • 160 equity factors.
  • Macroeconomic factors (non-durable consumption growth, durable consumption growth, industrial production growth, and personal income growth).
  • Major non-U.S. currencies (Australian Dollar, Canadian Dollar, Euro, Singapore Dollar and UK Pound).
  • Precious metals (gold, platinum and silver).

They also investigate potential predictors for cryptocurrency returns analogous to those of traditional asset classes (momentum, investor attention, price-to-“dividend” ratio, realized volatility and supply). Finally, they measure exposures of various industries to crypto-asset returns. Using daily crypto-asset prices for Bitcoin since January 2011 and for Ripple and Ethereum since early August 2013, all through May 2018, along with contemporaneous data for other variables as outlined above, they find that: Keep Reading

Bitcoin a Safe Haven Candidate?

Should investors consider Bitcoin as a safe haven from turbulent financial markets? In their June 2018 paper entitled “Bitcoin as a Safe Haven: Is It Even Worth Considering?”, Lee Smales and Dirk Baur assess the potential for Bitcoin as a safe haven, focusing on considerations beyond its low return correlations with other assets during times of market stress. Their comparison set of assets consists of gold (GLD) and bonds (10-year U.S. Treasury futures) as traditional safe havens, a proxy for the U.S. stock index (SPY) and mature (Apple) and immature (Twitter) individual stocks. They match samples by removing Bitcoin data for weekends and holidays. Using daily returns for Bitcoin and the comparison set of assets during August 2011 through May 2018, they find that: Keep Reading

Big Reward for Risk in Initial Coin Offerings?

Should investors pursue initial coin offerings (ICO), special-purpose crypto-tokens? In their May 2018 paper entitled “Digital Tulips? Returns to Investors in Initial Coin Offerings”, Hugo Benedetti and Leonard Kostovetsky study the market for crypto-tokens, focusing on: initial pricing; returns from buying at ICO and selling at date of listing on an exchange; and, returns from buying at listing date and holding for various fixed intervals. ICOs typically originate with an offeror’s prospectus detailing a goal, plan, team and offering schedule. Interested parties then register for the offering, with execution typically in stages over several months, some restricted to preferred users, angel investors, venture capitalists and/or accredited investors. The authors also employ Twitter accounts of ICO offerors to test the relationship between Twitter activity and price and to measure post-ICO attrition rate of offerors. Using data for 2,390 ICOs completed by May 2018, including offeror Twitter histories as of May 8, 2018, they find that:

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