Strategy Types
18 questions
What sets these pages apart from a trading guide?
They explain a strategy family's mechanism and research standing, but give no rules to trade on.
Why do academically supported effects often weaken in practice?
Because capital trying to exploit the effect changes price formation and shrinks future excess return.
What kind of portfolio do most study results apply to?
Broadly diversified portfolios held over long periods, not individual positions with limited capital.
What did Jegadeesh and Titman show in 1993?
That a strategy buying past winners and selling past losers earned a clear excess return over three to twelve months.
What is a momentum crash?
A sharp, brief drawdown of momentum strategies, typically occurring during recovery phases after market crises.
Which two camps face off in explaining the momentum effect?
Behavioral explanations citing delayed reactions and feedback, and risk-based explanations citing higher systematic risk in past winners.
What did De Bondt and Thaler find in 1985?
That stocks with the worst performance over three to five years clearly outperformed the former top performers over the following three to five years.
How can the short-term reversal effect be alternatively explained?
As compensation for supplying liquidity, when market makers demand higher prices during constraints.
On which time scales do momentum and mean reversion seem to contradict each other without actually doing so?
Momentum tends to hold over the medium term of three to twelve months, mean reversion over very short and very long terms.
What does Fama and French's HML factor measure?
The return gap between stocks with a high and a low ratio of book value to market value.
Which two explanations face off on the value premium?
A risk-based one reading financial distress as a risk signal, and a behavioral one citing overly optimistic expectations for growth stocks.
What changes in Fama and French's five-factor model?
Profitability and investment behavior get added as separate factors, which shrinks the standalone contribution of the pure valuation factor considerably.
What is the basic idea of pairs trading?
Trading two closely related securities once they diverge unusually far, expecting a return to their usual gap.
What did Gatev, Goetzmann, and Rouwenhorst find for 1962 to 2002?
For the best pairs, annualized excess returns of roughly eleven percent, even after conservatively estimated trading costs.
What do Do and Faff largely attribute the post-2002 decline in profitability to?
A growing share of non-converging pairs.
In which market phase does a grid bot work best?
A sideways phase, where the price fluctuates within the chosen range.
What happens if the price falls sharply below the grid's lower bound?
The bot keeps buying into the falling price and accumulates a growing position with an unfavorable average price.
Why should advertised return figures from grid-bot providers be treated with caution?
Because they usually come from the selling platforms themselves, with no independent academic study behind them.