Destabilizing momentum trading and counterbalancing contrarian strategy by large trader groups

2019 ◽  
Vol 19 (1) ◽  
pp. 83-106
Author(s):  
Jang Hyung Cho ◽  
Robert Daigler ◽  
YoungHa Ki ◽  
Janis Zaima
Keyword(s):  
Futures Markets ◽  
Trading Strategies ◽  
Institutional Trading ◽  
Momentum Strategy ◽  
Content Type ◽  
Contrarian Strategy ◽  
Market Makers ◽  
Contrarian Strategies ◽  
Momentum Trading ◽  
Individual Traders

Purpose The purpose of this paper is to assess trading strategies adopted by each large trader group and examine their effects on the volatility in the interest rate futures markets. Design/methodology/approach The Grinblatt et al.'s (1995) measure of momentum strategy is used to estimate the degree momentum and contrarian strategies. Then, regression analysis is used to determine the effects of trading strategies on volatility. Findings Up until 2005, the trades by non-clearing member firms in the futures market were separated from institutional traders providing us the opportunity to study trading strategies adopted by large distinct trading groups and its effects on volatility in the futures markets. It is found that individual traders use momentum strategy, whereas market makers and institutional traders use contrarian strategy. Momentum strategy adopted by individual traders increases volatility whereas contrarian strategy dampens volatility. Moreover, it is found that institutional traders engage more actively in contrarian trading when individual traders cause excessive volatility. The two distinct trading groups were separately tracked prior to 2005 giving us a unique window to determine the effect of the traders that conduct momentum trading as opposed to the ones that are contrarian traders. After the reclassification, the institutional trading group exhibited weaker contrarian strategy which can be attributed to the inclusion of non-clearing firm traders. Originality/value This study documents the first empirical evidence that shows off-exchange futures trader group is not composed of only pure noise makers, but there are short-term forecasters in its group. The authors also show a unique finding that noises caused by off-exchange group is from momentum strategy that they use, whereas contrarian strategy is used by institutional trader lower volatility.

Empirical evidence on the profitability of momentum trading strategies using ETFs

2020 ◽  
Vol 46 (11) ◽  
pp. 1321-1341
Author(s):  
Susana Yu ◽  
Gwendolyn Webb
Keyword(s):  
Financial Crisis ◽  
Empirical Evidence ◽  
Null Hypothesis ◽  
Trading Strategy ◽  
High Price ◽  
Momentum Strategy ◽  
Content Type ◽  
Relative Ease ◽  
Financial Crisis Of 2008 ◽  
Momentum Trading

PurposeWe extend empirical evidence on the profitability of momentum trading to the realm of plain-equity ETFs.Design/methodology/approachWe employ several ranking measures used in prior research, and for each we apply a traditional ranking based on total return, and a variation based only on the capital gain/loss portion of return.FindingsWhile we find that past momentum is not a strong predictor of future performance in our overall sample period, 2007 to June 2018, we find that the percent off 52-week high price results in positive performance in the recovery years following the financial crisis of 2008–2009.Research limitations/implicationsOur study is limited by the availability of ETF experience and data, and our test period covers just 2007 through June 2018. This period includes the financial crisis of 2008–2009, which previous research finding is associated with the momentum strategy's loss of profitability. When we exclude that period, we find evidence of a profitable momentum strategy based on the measure of percent off 52-week high price, enabling us to reject the null hypothesis that the momentum trading strategy is no longer profitable.Practical implicationsIt is profitable based on both return measures used in the rankings. Our finding of a profitable momentum trading strategy suggests that the null hypothesis that the momentum strategy is no longer profitable can be rejected.Originality/valueWhile perhaps not so strong as to reject the efficient markets hypothesis fully, our empirical findings are more consistent with a behavioral explanation and a market inefficiency. In view of the relative ease and low transactional costs of trading in ETFs, the markets have yet another opportunity to recognize an apparent mispricing and employ arbitrage based on it. To the extent that the relative ease of trading in ETFs makes momentum strategies easier to employ, the momentum anomaly might still be expected to disappear in an efficient market.

Time series momentum trading in green stocks

2020 ◽  
Vol 37 (2) ◽  
pp. 361-389 ◽  
Author(s):  
Gagari Chakrabarti ◽  
Chitrakalpa Sen
Keyword(s):  
Time Series ◽  
Trading Strategies ◽  
Asia Pacific ◽  
Momentum Strategies ◽  
Environment Friendly ◽  
Content Type ◽  
Carbon Footprints ◽  
The Usa ◽  
Green Investment ◽  
Momentum Trading

Purpose The purpose of this study is to explore the inherent instability, if any, in the context of investment in stocks of environment friendly companies (or the “green” stocks) across the globe using the time series momentum (TSM) trading strategies. Design/methodology/approach Using the monthly data for the Green Indexes from the USA, the Europe and the Asia-Pacific region over 2003-2019, the authors construct TSM trading strategies to examine the efficacy of regional Green Indexes as well as two diversified global green portfolios to offer abnormal return to attract investors, particularly speculators. The authors’ explore further whether such strategies could operate as hedging instrument. A comparison of results across different regions helps the authors establish a universal nature, if any, of investment in green stocks. Findings The study finds that regional Green Indexes are unable to outperform the market. The global green portfolios perform significantly better. The inefficacy of the relevant time series momentum trading strategies rules out the possibility of speculations. However, the number of profitable momentum strategies is significantly higher for the diversified portfolios in longer run. The portfolios perform significantly better in outperforming the buy-only strategies as well. The stable market, escalated demand and the resulting increment in valuation of green stocks make adoption of greener technologies a choice rather than a forced obligation. This offers a solution to the problem of Tragedy of Common. Originality/value Sustained increase in investment in green stocks is crucial from an environment perspective, as better valuation of their stocks would indubitably convince firms to reduce their carbon footprints. A continued enthusiasm however would require investors’ faith in it. Presence of momentum profit would invite speculators leading to irrational exuberance, dwindling confidence and consequent fragility. Literature on green investment is relatively sparse with the threat of its vulnerability issues left largely unnoticed. The authors’ study fills these gaps.

scholarly journals The Profitability of Momentum Strategies: Empirical Evidence from Damascus Securities Exchange (DSE)

2018 ◽  
Vol 5 (1) ◽  
pp. 16-29
Author(s):  
Oubay Mahmoud ◽  
Almougheer I Wardeh
Keyword(s):  
Empirical Evidence ◽  
Market Risk ◽  
Trading Strategies ◽  
Market Model ◽  
Momentum Effect ◽  
Momentum Strategy ◽  
Momentum Strategies ◽  
Monthly Data ◽  
Contrarian Strategy ◽  
Momentum Profits

The purpose of this study is to examine the profitability of Momentum based- trading strategies and investigate the causes of such profitability in Damascus Securities Exchange (DSE) market. The study analyzed 16 Momentum strategies based on full rebalancing and equally weighted techniques using monthly data from January 2010 to December 2016. The findings of the study showed low but significant Momentum effect, where the returns of Momentum portfolios were statistically positive only in 1 out of 16 strategies. Our findings suggest that Momentum strategy is applicable for winner portfolios whereas contrarian strategy is more appropriate for loser portfolios. We also adopted Market Model in order to investigate the possible risk-based explanations of Momentum profits, but we found that market risk is unable to explain the Momentum profitability in DSE market.

Analysis of fixed and biased asset allocation rebalancing strategies

2015 ◽  
Vol 42 (1) ◽  
pp. 42-50 ◽  
Author(s):  
Michael D Mattei ◽  
Nicholas Mattei
Keyword(s):  
Portfolio Management ◽  
Asset Allocation ◽  
Analysis Data ◽  
Portfolio Performance ◽  
Momentum Strategy ◽  
Content Type ◽  
Contrarian Strategy ◽  
Extra Effort ◽  
Portfolio Strategies ◽  
Wide Range

Purpose – Over the years a number of tactical, dynamic and strategic approaches for asset allocation have been developed to improve the objectivity of portfolio management. One of the most popular approaches is to annually rebalance a portfolio of six to ten assets classes back to an equal or fixed percentage. Most researchers agree that this is essentially a contrarian strategy. The purpose of this paper is to develop and evaluate an asset allocation methodology using a biasing factor that can implement a momentum strategy for investors who might prefer momentum investing. Design/methodology/approach – Three portfolio strategies, buy and hold, equal rebalancing and bias factor rebalancing are compared using 20 years of performance data and a diversified set of eight asset classes. The biased approach is then tested using two years of data not included in the original analysis data. Findings – This research demonstrates that there is a wide range of active rebalancing approaches that can easily implement either a momentum or a stronger contrarian strategy. In addition, the findings present considerable evidence that a partial or full biased momentum approach can result in improved portfolio performance with reduced risk over longer time periods. Practical implications – The results for buy and hold show that the traditional equal rebalancing strategy may not be worth the extra effort required to implement it. Originality/value – Even though the full momentum approaches are less diversified than the buy and hold or the equal rebalancing strategies, it resulted in superior risk-adjusted returns as measured by the Sharpe ratio.

Profitability of Volume-based Momentum and Contrarian Strategies in the Indian Stock Market

2017 ◽  
Vol 18 (4) ◽  
pp. 974-992 ◽  
Author(s):  
Supriya Maheshwari ◽  
Raj S. Dhankar
Keyword(s):  
Stock Market ◽  
Trading Volume ◽  
Investment Strategies ◽  
Momentum Strategy ◽  
Contrarian Strategy ◽  
Life Cycle Theory ◽  
Contrarian Strategies ◽  
Long Run ◽  
Indian Stock Market ◽  
Relationship Of

This article investigates the relationship of trading volume with the profitability of momentum and long-run contrarian strategies for the Indian stock market. The result of the study provides support to Lee and Swaminathan (2000, The Journal of Finance, 55(5), 2017–2069) argument that trading volume predicts both the magnitude as well as the persistence of momentum in the long run. The portfolio of heavily traded securities earned higher momentum and contrarian returns as compared to low-trading securities portfolio in the Indian stock market. Hence, returns from both momentum and contrarian portfolios are positively related to the level of trading activity in the security. Further, the results provide evidence in favour of volume-based investment strategies. Both volume-based momentum strategy and volume-based contrarian strategy generate higher return in the Indian stock market as compared to pure momentum and contrarian strategy. In addition, the study provides support to momentum life cycle theory in explaining the relation between trading volume and momentum returns in the Indian stock market. These findings cast strong implication for Indian investors who are continuously engaged in identifying profitable investment strategies that can generate higher returns.

scholarly journals Can Economic Factors Improve Momentum Trading Strategies? The Case of Managed Futures during the COVID-19 Pandemic

Economies ◽  
2021 ◽  
Vol 9 (2) ◽  
pp. 86
Author(s):  
Renata Guobužaitė ◽  
Deimantė Teresienė
Keyword(s):  
Financial Markets ◽  
Risk Premium ◽  
Trading Strategies ◽  
Economic Factors ◽  
Momentum Strategies ◽  
New Approach ◽  
Managed Futures ◽  
Asset Classes ◽  
Momentum Trading ◽  
Insight Into

Systematic momentum trading is a prevalent risk premium strategy in different portfolios. This paper focuses on the performance of the managed futures strategy based on the momentum signal across different economic regimes, focusing on the COVID-19 pandemic period. COVID-19 had a solid but short-lived impact on financial markets, and therefore gives a unique insight into momentum strategies’ performance during such critical moments of market stress. We offer a new approach to implementing momentum strategies by adding macroeconomic variables to the model. We test a managed futures strategy’s performance with a well-diversified futures portfolio across different asset classes. The research concludes that constructing a portfolio based on academically/economically sound momentum signals with its allocation timing based on broader economic factors significantly improves managed futures strategies and adds significant diversification benefits to the investors’ portfolios.

Market Makers and Liquidity Premium in Electricity Futures Markets

2022 ◽  
Vol 43 (2) ◽  
Author(s):  
Juan Ignacio Peña ◽  
Rosa Rodríguez
Keyword(s):  
Futures Markets ◽  
Liquidity Premium ◽  
Market Makers

Markets are overreacting to US price and rates risks

2021 ◽  
Keyword(s):  
Federal Reserve ◽  
Futures Markets ◽  
The United States ◽  
Oil Price ◽  
Bond Markets ◽  
Crude Oil Price ◽  
Bond Yields ◽  
Content Type ◽  
Bond Yield ◽  
Ongoing Support

Significance The continuation of the modest manufacturing downturn follows the recent report of slower third-quarter GDP growth. Despite slower growth, bond markets are challenging an attempt by the Federal Reserve (Fed) to delink tapering from tightening by bringing forward their forecasts for rate increases: futures markets are pricing in two 25-basis-point rate hikes by end-2022. Impacts Equities are at a record high in the United States; providing ongoing support for this, real US bond yields remain in negative territory. The Brent crude oil price is near its highest since 2014; further upside will be limited but it is likely to stay high well into 2022. Germany’s ten-year bond yield, negative since April 2019, has risen by 40 basis points since end-August and will soon turn positive.

Volatility, trading volume and open interest in futures markets

2016 ◽  
Vol 12 (5) ◽  
pp. 629-653 ◽  
Author(s):  
Christos Floros ◽  
Enrique Salvador
Keyword(s):  
Interest Rates ◽  
Trading Volume ◽  
Futures Markets ◽  
Empirical Relation ◽  
Impulse Response Functions ◽  
Open Interest ◽  
Content Type ◽  
Daily Data ◽  
Relevant Role ◽  
Stage Estimation

Purpose The purpose of this paper is to examine the effect of trading volume and open interest on volatility of futures markets. The authors capture the size and change in speculative behaviour in futures markets by examining the role of liquidity variables (trading volume and open interest) in the behaviour of futures prices. Design/methodology/approach The sample includes daily data covering the period 1996-2014 from 36 international futures markets (including currencies, commodities, stock indices, interest rates and bonds). The authors employ a two-stage estimation methodology: first, the authors employ a E-GARCH model and consider the asymmetric response of volatility to shocks of different sign. Further, the authors consider a regression framework to examine the contemporaneous relationships between volatility, trading volume and open interest. To quantify the percentage of volatility that is caused by liquidity variables, the authors also regress the estimated volatilities on the measures of open interest and trading volume. Findings The authors find that: market depth has an effect on the volatility of futures markets but the direction of this effect depends on the type of contract, and there is evidence of a positive contemporaneous relationship between trading volume and futures volatility for all futures contracts. Impulse-response functions also show that trading volume has a more relevant role in explaining market volatility than open interest. Practical implications These results are recommended to financial managers and analysts dealing with futures markets. Originality/value To the best of the authors’ knowledge, no study has yet considered a complete database of futures markets to investigate the empirical relation between price changes (volatility), trading volume and open interest in futures markets.

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