Strategy Types
18 questions
What sets these pages apart from a trading guide?
They explain how a family of strategies works and what research says about it, but give no rules to copy.
Why do academically supported effects often weaken in practice?
Because money trying to exploit the effect changes prices and makes the future excess return smaller.
What kind of portfolio do most study results apply to?
For broadly diversified portfolios held for a long time, not for single positions with little money.
What did Jegadeesh and Titman show in 1993?
That it paid to buy the winners of the last three to twelve months and sell the losers.
What is a momentum crash?
A violent, short crash of momentum strategies, usually in a recovery after a crisis.
Which two camps face off in explaining the momentum effect?
One side says investors react too slowly and trend followers amplify that, the other says past winners carry more risk.
What did De Bondt and Thaler find in 1985?
That the stocks that did worst over three to five years clearly beat the former leaders over the following three to five years.
How can the short-term reversal effect be alternatively explained?
As payment for providing liquidity, when market makers charge more for it because funds are tight.
On which time scales do momentum and mean reversion seem to contradict each other without actually doing so?
Momentum tends to hold over three to twelve months, mean reversion over very short and very long periods.
What does Fama and French's HML factor measure?
The difference in return between stocks with a high and a low ratio of book value to market value.
What changes in Fama and French's five-factor model?
Profitability and investment are added as separate factors, and that makes the pure valuation factor's own contribution much smaller.
What is the basic idea of pairs trading?
Trading two closely related securities as soon as they drift unusually far apart, betting that they'll return to their usual gap.
What did Gatev, Goetzmann, and Rouwenhorst find for 1962 to 2002?
For the best pairs, about eleven percent extra return a year, even after carefully estimated trading costs.
What do Do and Faff largely attribute the post-2002 decline in profitability to?
To more and more pairs not coming back together.
In which market phase does a grid bot work best?
When the market moves sideways and the price swings within the chosen range.
What happens if the price falls sharply below the grid's lower bound?
The bot buys more at every step and builds an ever larger position whose value keeps falling.
Why should advertised return figures from grid-bot providers be treated with caution?
Because they mostly come from the platforms selling the bots, with no independent study behind them.