An examination of momentum strategies in commodity futures markets

Commodity futures and equity markets differ in several important respects. Nevertheless, it was found that momentum profits in commodities are highly significant for holding periods as long as 9 months, and returns to momentum strategies are roughly equal in magnitude to those that have been reported in stocks. The profits documented are too large to be subsumed by transactions costs. Although the momentum strategies appear to be quite risky, their profitability cannot be fully accounted for in the context of a market factor model. Further, it is shown that momentum profits eventually reverse if positions are maintained long enough after portfolio formation. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:227–256, 2007     

Momentum Strategies and Investor Sentiment in the REIT Market

Comparing across three momentum measures, we empirically find that the 52‐week high strategy plays a dominant role in generating momentum profits in the Real Estate Investment Trust (REIT) market. The profitability of the 52‐week high strategy, however, varies with the state of investor sentiment. Specifically, we find that the 52‐week high momentum earns significantly positive returns following optimistic periods and significantly negative returns following pessimistic periods. Further evidence indicates that investor sentiment serves as a better predictive variable in explaining the REIT momentum than market states, business cycles, legislation changes, and monetary policy changes. Overall, our findings are in line with behavioral theories in explaining the REIT momentum.     

Buy Low and Sell High: The 52‐Week Price Range and Predictability of Returns

This paper uses the ratio of 52‐week high to low prices to construct a self‐financing portfolio strategy, which buys stocks with a low range ratio and sells stocks with a high range ratio according to the behavioral perspective. The results indicate that the profits from this range strategy are substantial and outperform those of 52‐week high and conventional momentum strategies. Moreover, the incremental effect of the range strategy on 52‐week high momentum is significantly positive, while the 52‐week high strategy diminishes this strategy's profitability. Overall, the range measure is better than conventional measures at predicting future returns.     

Price and Earnings Momentum,Transaction Costs,and an Innovative Practitioner Technique

We use an innovative practitioner technique to investigate the interplay between the ex post performance of momentum strategies and transaction costs, rebalancing frequency, turnover constraints, and fund size. We have three interrelated main results: first, the level of and correlation between active returns to price momentum and earnings momentum strategies vary dramatically with these factors; second, strategies that are fearful of ex ante transaction costs generate returns net of transaction costs that are far superior to the net returns of naive strategies; and third, obtaining better traction with the unique elements of each strategy yields a more profitable combined strategy.     

Simple Trading Rules and the Market for Internet Stocks

We investigate the profitability of moving average trading rules for Internet stocks based on the Dow Jones Internet Composite Index. Consistent with previous studies e.g. Brock et al. (1992), returns after buy signals exceed returns after sell signals. The average buy–sell spread is large and significant even after accounting for transaction costs. Bootstrap simulations based on a version of the dynamic CAPM show that the model is able to replicate the pattern of buy and sell returns. Simulated buy–sell spreads amount on average to more than 39% of the actual spread. However, actual profits are still too large to be explained in terms of risk compensation.     

Compete in Price or Service?—A Study of Personalized Pricing and Money Back Guarantees

Retailers use both pricing and service strategies to respond to intensified competition. Here we develop a duopoly model to investigate the impact of the increasingly popular personalized pricing strategy (PPS) and the widely used Money Back Guarantee (MBG) customer returns policy. We consider two retailers who differ in customer satisfaction rates. Each retailer chooses a pricing strategy, PPS or uniform pricing, and a product return strategy, MBG or ‘no returns.’ We show that both PPS and MBG are dominant strategies, but their impact on retailers’ prices and profits are different; while PPS intensifies price competition and may lead to a prisoner’s dilemma in which both retailers may lose profit, MBG mitigates price competition and may result in a Pareto improvement in both retailers’ profits. Both PPS and MBG increase the size of the overall market, but not the total duopoly profit. The total customer surplus and social welfare may increase under either strategy. In addition, we obtain some interesting observations as to how our results may change if the product quality/customer satisfaction rate is endogenously chosen in the duopoly. Some of our findings are in contrast to related results reported in the literature.     

Do tax-exempt yields adjust slowly to substantial changes in taxable yields?

This paper examines the profitability of two futures trading strategies: a municipal bond futures contract strategy and a spread strategy consisting of a municipal bond futures contract and a Treasury bond futures contract. Both strategies are designed to exploit a slow municipal yield adjustment following changes in Treasury yields. We find economically significant profits to both strategies. Average holding period returns per trade for both strategies tend to increase with the magnitude of the Treasury yield change. Profit distributions associated with various Treasury yield change thresholds tend to be positively skewed, and median profits are significantly lower than average profits. The profitability results are consistent with slow municipal yield adjustments. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:763–789, 2008     

Optimal Returns Policy under Demand Uncertainty

Multiple categories of retail products suffer limited shelf life, demand uncertainty, and, in some cases, long lead times. To provide retailers with an incentive to increase the stocking quantity of such products, manufacturers may offer an option to return unsold items at wholesale or less than wholesale prices. This article extends the additive price-dependent demand model in three ways. First, partial returns are optimal for the manufacturer but do not induce higher stocking quantities compared with when the manufacturer offers no returns. Second, in terms of the effect of investment in demand-enhancing activities, when retailers invest, they set higher resale prices, but an optimal partial returns policy still does not induce higher stocking quantity, whereas when manufacturers invest, the optimal returns policy induces higher stocking quantity. Third, when the manufacturer and retailer have different expectations of demand uncertainty, the retailer's estimate influences the expected profits for both, whereas the manufacturer's estimate has a major impact on its profits only.     

The trend premium around the world: Evidence from the stock market

This paper studies the predictive power of the trend strategy in the international stock market. Using data from 49 markets, we find that a trend signal exploiting the short-, intermediate-, and long-term price information can predict stock returns cross-sectionally in the international market. The significance of the trend strategy is associated with market-level characteristics such as macroeconomic conditions, culture, and the information environment. The trend premium is more pronounced in markets with a more advanced macroeconomic status, a higher level of information uncertainty and individualism, and better accessibility to foreign investors. Nevertheless, the trend strategy only outperforms the momentum strategy in a relatively short horizon.     

Time-series momentum in China's commodity futures market

This study examines the time-series momentum in China's commodity futures market. We find that a time-series momentum strategy outperforms classical passive long and cross-sectional momentum strategies in terms of the Sharpe ratio, risk-adjusted excess returns, and cumulative returns. The time-series momentum strategy with a 1-month look-back period and a 1-month holding period exhibits the best performance. We observe clear time-series momentum patterns and find that the time-series momentum strategy is effective in the Chinese commodity futures market. However, the momentum lasts for less time in China than in the United States because China's futures market seems to have a greater number of speculative investors.     

Abnormal trading volume and autoregressive behavior in weekly stock returns in the Saudi stock market

This paper examines the relationship between the abnormal change in trading volume of both individual stocks and portfolios and short-term price autoregressive behavior in the Saudi stock market (SSM). Our objective is to investigate the informational role that trading volume plays in predicting the direction of short-term returns. We evaluate whether the abnormal change in lagged, contemporaneous, and lead turnovers affects serial correlation in returns. Specifically, we examine if and when the change in volume produces momentum (positive correlation) or reversal (negative autocorrelation) in consecutive weekly stock returns.We find a reversal in weekly stock returns when conditioned on the change in lagged volume in the SSM. Our results are consistent for the whole sample, the two sub-sample periods, and the large- and small-firm portfolios. The results are consistent with Campbell, Grossman, and Wang [Campbell, J. Y., S. J. Grossman, and J. Wang, 1993, Trading volume and serial correlation in stock returns, Quarterly Journal of Economics, 108, 905–939], who present a model in which risk-averse market makers accommodate the selling pressure of liquidity or non-informational traders. We also find that reversal is more pronounced with the loser portfolio as specified by filter-based methodology. The overall result of this paper is also consistent with the empirical findings of Conrad, Hameed, and Niden [Conrad, J., A. Hameed, and C. Niden, 1994, Volume and autocovariances in short-horizon individual security returns, Journal of Finance 49, 1305–1329.] and Gebka [Gebka, B., 2005, Dynamic volume-return relationship: evidence from an emerging market, Applied Financial Economics, 15, 1019–1029] in which they report price reversal for stock with high trading volume.     

The six pricing myths that kill profits

Pricing is the most important driver of profits. Pricing is also, surprisingly, the area most executives overlook when implementing initiatives to increase profits. There is a reason: Research presented in this article suggests that most executives implicitly hold on to a series of weakly held assumptions about pricing that ultimately are self-defeating. These pricing myths are that (1) costs are the basis for price setting, (2) small price changes have little impact on profits, (3) customers are highly price sensitive, (4) products are difficult to differentiate, (5) high market share leads to high profits, and (6) managing price means changing prices. This research shows how executives can overcome these misconceptions and thus implement sustainable profit improvements via pricing.     

RISK METRICS AND FINE TUNING OF HIGH‐FREQUENCY TRADING STRATEGIES

We propose risk metrics to assess the performance of high‐frequency (HF) trading strategies that seek to maximize profits from making the realized spread where the holding period is extremely short (fractions of a second, seconds, or at most minutes). The HF trader maximizes expected terminal wealth and is constrained by both capital and the amount of inventory that she can hold at any time. The risk metrics enable the HF trader to fine tune her strategies by trading off different metrics of inventory risk, which also proxy for capital risk, against expected profits. The dynamics of the midprice of the asset are driven by information flows which are impounded in the midprice by market participants who update their quotes in the limit order book. Furthermore, the midprice also exhibits stochastic jumps as a consequence of the arrival of market orders that have an impact on prices which can give rise to market momentum (expected prices to trend up or down). The HF trader's optimal strategy incorporates a buffer to cover adverse selection costs and manages inventories to maximize the expected gains from market momentum.     

Non‐Tradable Share Reform,Liquidity, and Stock Returns in China

This article studies the influence of the non‐tradable share reform in the cross‐section of stock returns in China. Prior research has generally neglected this important development in the Chinese stock market. We find that the firm‐specific illiquidity measures that reflect direct transaction costs, price impact and difficulties in trading immediacy, exhibit a positive and significant relationship with stock returns. These effects are particularly pronounced after the non‐tradable share reform. Furthermore, in the post‐reform era, portfolios with high illiquidity (i.e. high relative bid–ask spread, high Amihud illiquidity, low Amivest liquidity ratio) significantly outperform portfolios with low illiquidity, controlling for size, and book‐to‐market effects.     

Predictive abilities of speculators in energy markets

Using nonparametric methodology, I find that speculators are successful in taking profitable positions in energy futures markets, although the magnitude of this effect is lower than that found previously for agricultural markets. A plausible explanation for this difference is that price forecasting is more difficult for energy commodities. Moreover, I find that the energy speculators’ returns are due to the existence of the risk premiums rather than to speculators’ forecasting abilities. Futures risk premium is highly time-variant; notably, energy investors’ profits have been very limited in the GFC and post-GFC period, which coincided with the financialization of commodity markets.     

The temporal pattern of trading rule returns and exchange rate intervention: intervention does not generate technical trading profits

This paper characterizes the temporal pattern of trading rule returns and official intervention for Australian, German, Swiss and U.S. data to investigate whether intervention generates technical trading rule profits. The data reject the hypothesis that intervention generates inefficiencies from which technical rules profit. In particular, high frequency data show that abnormally high trading rule returns precede German, Swiss and U.S. intervention. Australian intervention precedes high trading rule returns, but trading/intervention patterns make it implausible that intervention actually generates those returns. Rather, intervention responds to exchange rate trends from which trading rules have recently profited.     

Do stock prices undervalue investments in advertising?

Under the efficient market hypothesis, the stock price incorporates the full value of a firm’s advertising. If so, advertising spending should not be associated with future abnormal stock returns. Nevertheless, from 1995 to 2015, advertising spending often leads to abnormal stock returns the following year. The strongest results surface for consumer goods and services where advertising used to build brand equity can carryover from one year to the next. No significant differences arise for healthcare, industrial goods, or retailer advertising. Healthcare and industrial goods advertising is often modest. Retailer advertising that builds traffic should have little if any carryover into the following year. These results may help marketing managers defend an advertising budget whose benefits carryover into the following year, but hurt current profits. Having more investment analysts on Wall Street with a marketing background should help reduce this overly conservative “wait and see” discount for carryover advertising.     

Optimal contract design: For whom?

In designing a derivative contract, an exchange carefully considers how its attributes affect the expected profits of its members. On November 3, 1997, the Chicago Mercantile Exchange doubled its tick size of its S&P 500 futures contract and halved the denomination, providing a rare opportunity to examine empirically the search for an optimal contract design. This article measures changes in the trading environment that occurred in the days surrounding the contract redesign. We find a discernible change in the incidence of price clustering, an increase in the bid/ask spread, a reduction in trading volume, and no meaningful change in dollar trade size. These results suggest that the contract redesign did not increase accessibility but did increase market maker revenue. Despite the increase, however, the bid/ask spread of the S&P 500 futures contract remains low relative to the costs of market making and the spreads in markets for competing instruments. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:719–750, 2003     

Stock return predictability of the cumulative abnormal returns around the earnings announcement date: Evidence from China

We find that cumulative abnormal returns adjusted by size, book-to-market, and momentum around the earnings announcement date (DGTW_CAR3 hereafter) significantly and positively predict stock returns in the 6-month period from May 2005 to October 2020 in the China's A-shares market. The monthly equally-weighted DGTW_CAR3 premiums are 0.47% and 0.67% after risk adjustment. Although stock price delay fails to fully account for the DGTW_CAR3 premium, we find that the DGTW_CAR3 premium is more significant for illiquid stocks and during periods with high investor sentiment. This result suggests that market inefficiency explains the DGTW_CAR3 premium. Further analysis shows that, in addition to earnings information, the optimism reflected in the management discussion and analysis section of the annual or half-year report also contributes to the DGTW_CAR3 premium. This finding implies that DGTW_CAR3 may contain new fundamental information that correlates significantly and positively with future stock performance. Finally, we find that the institutional ownership change of a stock associated with DGTW_CAR3 also significantly and positively predicts the stock's return, suggesting that institutional investors adjust their holdings according to DGTW_CAR3 and consequently influence the demand for the stock in the China's A-shares market.     

The Impact of Fraudulent False Information on Equity Values

There are two types of stock price manipulation examined in the theoretical literature: (1) insider trading, which involves private information that is true and (2) the public spreading of fraudulent false information. While there is a large empirical literature on insider trading, this is the first empirical article to examine the impact of false, fraudulent public information on stock prices and trading volume. We find that such false information, even after being denied by a credible source such as the SEC, generates both abnormal returns and abnormal trading volume. We also find that the effects of the false information on security returns and volume can be persistent for at least 2 weeks. In addition, we show that perpetrators of false news attacks can make potentially large profits from such market manipulations.