Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for December 2021 (Final)
Cash TLT LQD SPY

Momentum Investing Strategy (Strategy Overview)

Allocations for December 2021 (Final)
1st ETF 2nd ETF 3rd ETF

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?

Bitcoin Price Repeatedly Manipulated?

Benford’s law states that the probability of the value of the first digit in many naturally occurring samples of numbers, including asset prices, varies inversely with digit magnitude. For example, the number 1 (9) appears as the leading digit about 30% (less than 5%) of the time. For asset prices, deviations from this law typically indicate some kind of fraud. In his September 2020 paper entitled “To the Moon: A History of Bitcoin Price Manipulation”, Timothy Peterson applies Benford’s law to daily bitcoin prices over a long sample and by calendar year to identify price manipulations. He requires that each bin [0 through 9] in the price distribution histogram have at least eight observations. If this condition is not met for the first digit, he relies on the second digit. If not for the first and second digits, he relies on the third digit. To rule out speculative mania as the cause of unusual price activity, he uses daily ratios of price to three fundamental network size and activity metrics: (1) active addresses, (2) non-zero balance addresses and (3) transaction counts. Using daily closing Bitcoin price and activity data during July 2010 through May 2020, he finds 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 exchange-traded fund (ETF) asset class proxies used in the Simple Asset Class ETF Momentum Strategy (SACEMS) and the Simple Asset Class ETF Value Strategy (SACEVS) at a monthly measurement frequency. Using monthly dividend-adjusted closing prices for CYB and the asset class proxies during May 2008 (when CYB is first available) through August 2020 (147 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 exchange-traded fund (ETF) asset class proxies used in the Simple Asset Class ETF Momentum Strategy (SACEMS) or the Simple Asset Class ETF Value Strategy (SACEVS) at a monthly measurement frequency. Using monthly dividend-adjusted closing prices for FXE and the asset class proxies since February 2006 as available through July 2020, we find that: Keep Reading

Asset Class ETF Interactions with the U.S. Dollar

How do different asset classes interact with U.S. dollar valuation? To investigate, we consider relationships between Powershares DB US Dollar Index Bullish Fund (UUP) and the exchange-traded fund (ETF) asset class proxies used in the Simple Asset Class ETF Momentum Strategy (SACEMS) or the Simple Asset Class ETF Value Strategy (SACEVS) at a monthly measurement frequency. Using monthly dividend-adjusted closing prices for UUP and the asset class proxies since March 2007 as available through July 2020, we find that: Keep Reading

The BGSV Portfolio

How might an investor construct a portfolio of very risky assets? To investigate, we consider:

  • First, diversifying with monthly rebalancing of:
    1. Bitcoin Investment Trust (GBTC), representing a very long-term option on Bitcoins.
    2. VanEck Vectors Junior Gold Miners ETF (GDXJ), representing a very long-term option on gold.
    3. ProShares Short VIX Short-Term Futures (SVXY), to capture part of the U.S. stock market volatility risk premium by shorting short-term S&P 500 Index implied volatility (VIX) futures. SVXY has a change in investment objective at the end of February 2018 (see “Using SVXY to Capture the Volatility Risk Premium”).
  • Second, capturing upside volatility and managing drawdown of this portfolio via gain-skimming to a cash position.

We assume equal initial allocations of $10,000 to each of the three risky assets. We execute a monthly skim as follows: (1) if the risky assets have month-end combined value less than combined initial allocations ($30,000), we rebalance to equal weights for next month; or, (2) if the risky assets have combined month-end value greater than combined initial allocations, we rebalance to initial allocations and move the excess permanently (skim) to cash. We conservatively assume monthly portfolio reformation frictions of 1% of month-end combined value of risky assets. We assume accrued skimmed cash earns the 3-month U.S. Treasury bill (T-bill) yield. Using monthly prices of GBTC, GDXJ and SVXY adjusted for splits and dividends and contemporaneous T-bill yield during May 2015 (limited by GBTC) through June 2019, we find that:

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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 December 2019, 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 exchange-traded fund (ETF) asset class proxies used in “Simple Asset Class ETF Momentum Strategy” (SACEMS) at a monthly measurement frequency. Using monthly dividend-adjusted closing prices for FXY and the asset class proxies since March 2007 as available through July 2019, we find that: Keep Reading

Cryptocurrency Factor Model

Do simple factor models help explain future return variations across different cryptocurrencies, as they do for stocks? In their April 2019 paper entitled “Common Risk Factors in Cryptocurrency”, Yukun Liu, Aleh Tsyvinski and Xi Wu examine performances of cryptocurrency (coin) counterparts for 25 price-related and market-related stock market factors, broadly categorized as size, momentum, volume and volatility factors. They first construct a coin market index based on capitalization-weighted returns of all coins in their sample. They then each week sort coins into fifths based on each factor and calculate average excess return for a portfolio that is long (short) coins in the highest (lowest) quintile. Finally, they investigate whether any small group of factors accounts for returns of all significant factors. Using daily prices in U.S. dollars and non-return variables (excluding top and bottom 1% values as potential errors/outliers) for all coins with market capitalizations over $1 million dollars from Coinmarketcap.com during January 2014 through December 2018 (a total of 1,707 coins, growing from 109 in 2014 to 1,583 in 2018), they find that:

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ICO Performance Tendencies

Are Initial Coin Offerings (ICO), also called token sales or token offerings, typically good investments? ICOs are smart contracts on a blockchain (usually Ethereum) that enable firms to raise money directly from investors. The median time for listing a successful ICO on a token exchange is 42 days. In the May 2019 revision of his paper entitled “The Pricing and Performance of Cryptocurrency”, Paul Momtaz examines the performance of ICOs for horizons of one day to three years after initial listing. He also investigates whether there are robust predictors of initial pricing and longer term performance. His sample consists of all tokens tracked by coinmarketcap.com during January 2013 through April 2018, less confirmed errors and outliers in extreme 1% tails because they are unverifiable. His benchmark for calculating abnormal returns is the market capitalization-weighted return of cryptocurrencies (dominated by Bitcoin and Ethereum). Using daily high, low and closing prices, market capitalizations and trading volumes of 1,403 ICOs and daily closes of major cryptocurrencies during the specified period, he finds that: Keep Reading

Number of Users as Bitcoin Price Driver

How should investors assess whether the market is fairly valuing cryptocurrencies such as Bitcoin? In his March 2019 paper entitled “Bitcoin Spreads Like a Virus”, Timothy Peterson offers a way to value Bitcoin based on Metcalf’s Law (network economics) and  a Gompertz function (often used to describe biological activity). The former model estimates fair price based on number of active users, and the latter model estimates the growth rate of active users. Using findings from prior research plus daily Bitcoin price and active account data from coinmetrics.io and blockchain.info during July 2010 through February 2019, he finds that: Keep Reading

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