1/ Carry and Time-Series Momentum: A Match Made in Heaven

"Conditioning trading signals of time-series momentum on the sign of the basis (carry), improves the Sharpe ratio. The improvement in is greater during recessions (when it matters most)."

papers.ssrn.com/sol3/papers.cf…
2/ The authors start with a basket of liquid futures (equities, commodities, fixed income, and foreign exchange).

Basis is the percentage difference between the prices of the front- and back-month futures contracts.

Time-series momentum is the sign of trailing 12-month return.
3/ "The slope coefficient is 0.89 for 1-month basis and 0.90 for 12-month basis with corresponding t-statistics of 13.35 and 14.85. The adjusted R² values are high, 0.67 and 0.68. This result indicates that basis is an important component of returns."
4/ Koijen, Moskowitz, Pedersen, Vrugt find that time-series momentum and carry are different strategies:


They also find similar results for carry using 1-month and 12-month smoothed signals:

and
5/ "We account for transaction costs during portfolio rebalances and rolls of futures contracts... described in Exhibit 5.

"Sharpe ratio is calculated using monthly excess returns as the ratio of an annualized excess return with geometric compounding and an annualized SD."
6/ The authors modify time-series momentum by allowing it to go long or short only when the basis (carry) signal is in agreement.

The result is improved Sharpe ratios (for both inverse vol and equal weighting and for both 1-month and 12-month basis signals).
7/ "We find a consistent pattern of the strategy delivering a higher Sharpe ratio in economic terms, though the difference in performance is statistically significant only during early recessions.... a period associated with very negative performance of the stock market."
8/ Results are similar using Sortino ratios:

Adding the basis (carry) filter to time-series momentum generally improves performance. This is only statistically significant for the first half of recession periods, though this is arguably a time when the difference matters most.

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More from @ReformedTrader

Feb 18
1/ Imagine the board game Risk, quant style.

In the quant version, replace continents with big asset managers.

Instead of country cards, draw 'power up' cards for value, momentum, leverage, etc. that can be hoarded, used in combination, then discarded.

boardgamegeek.com/boardgame/181/…
2/ Value, momentum: +1 defensive, +1 offensive (if attacking, you get +1 and subtract 1 from your partner's dice roll; vice versa if you are defending)

Quality, trend: +2 defensive

Carry: +2 offensive

Growth, market beta: +1 offensive, -1 defensive

Leverage: 2x gains & losses
3/ As in standard risk, draw a 'power up' card if you end a turn with more territories than when you started. Up to five cards can be hoarded and used when you are either attacking or defending. They can be used during that entire encounter and then discarded.
Read 5 tweets
Feb 16
1/ Short Squeezes and Their Consequences (Schultz)

"Short squeezes are not unusual for the hardest-to-borrow stocks, and re-establishing short positions is expensive. If a short seller does not reinitiate after a squeeze, he misses out on large returns."

papers.ssrn.com/sol3/papers.cf…
2/ "There is overwhelming evidence in the literature that stocks with binding short sale constraints, as measured by high borrowing fees or short interest, earn poor returns. The abnormal returns suggest that there may also be significant risks to short selling."
3/ "For some stocks, it can be difficult to locate shares to borrow. It might seem that shares could still be borrowed easily when utilization is just 70%, but share lending is a fragmented market. A potential borrower’s normal sources of shares may have no shares to loan."
Read 22 tweets
Feb 15
1/ Smartest Guys in the Room: The Amazing Rise And Scandalous Fall of Enron (Bethany McLean, Peter Elkind)

Skilling: “Enron was a great company.”
"Indeed, that’s how it seemed until the moment it filed the largest bankruptcy claim in U.S. history." (p.29)
amazon.com/Smartest-Guys-…
2/ "Fortune magazine named Enron “America’s most innovative company” six years running. Henry Kissinger & James Baker were on its lobbying payroll. Nobel laureate Nelson Mandela came to Houston to receive the Enron Prize. The U.S. president called Enron chairman Lay “Kenny Boy.”
3/ "Enron had transformed the way gas & electricity flowed across the U.S. It bankrolled audacious projects around the globe: state-of-the-art power plants in third world countries, a pipeline slicing through an endangered Brazilian forest, a steel mill on the coast of Thailand.
Read 6 tweets
Feb 15
"Out of a universe of 25 commodities in the Bloomberg Commodity Index, more than half are now in backwardation.

"These are the highest levels of commodities in backwardation in the last three decades. The roll yield is now a benefit instead of a drag."

wisdomtree.com/blog/2022-02-1… ImageImageImage
Read 5 tweets
Feb 4
1/ A Wandering Mind is an Unhappy Mind (Killingsworth, Gilbert)

"A human mind is a wandering mind; a wandering mind is an unhappy mind. The ability to think about what is not presently happening is a cognitive achievement that comes at an emotional cost."
wjh-www.harvard.edu/~dtg/KILLINGSW…
2/ " “Stimulus-independent thought” or “mind wandering” appears to be the brain’s default mode and allows people to learn, reason, and plan.

"Unfortunately, collecting real-time reports as people go about their daily lives is cumbersome and expensive.
3/ "Such experience sampling has rarely been used to investigate the relationship between mind wandering and happiness and has always been limited to very small samples.

"We solved this problem by developing aWeb application for the iPhone that contacts people at random moments.
Read 13 tweets
Feb 4
1/ The Great Inflation, Factors, and Stock Returns (Stanhope)

"Equities as a whole may not welcome high rates of inflation, but certain stock selection factors have shown resilience in periods of rising prices."

canvas.osam.com/Commentary/Blo…
2/ "During the Great Inflation era (1965-1982), inflation annualized at 6.5%. While comparisons to our current situation are tempting, the structure of the global economy and monetary, fiscal, energy, and labor policies are dramatically different."
3/ "Inflation is a ‘tax’ on revenues, not profits.

"High taxes in high-inflation regimes can push the effective tax rate above 100%, leading corporations to rack up expenses to reduce pre-tax profits.

"Current corporate tax rates should not exacerbate inflationary forces."
Read 7 tweets

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