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On the profitability of momentum strategies and optimal leverage rules
Umeå universitet, Samhällsvetenskapliga fakulteten, Handelshögskolan vid Umeå universitet, Nationalekonomi.
2020 (Engelska)Doktorsavhandling, sammanläggning (Övrigt vetenskapligt)Alternativ titel
Angående vinsten från momentum strategier samt regler för optimal hävstång (Svenska)
Abstract [en]

This thesis consists of an introductory part and five self-contained papers related to the profitability of momentum strategies and optimal leverage rules.

Paper [I] tests the success rate of trades and the returns of the Opening Range Breakout (ORB) day trading strategy. A trader that trades the ORB strategy seeks to identify large intraday price movements and trades only when the price moves beyond some predetermined threshold. We present an ORB strategy based on normally distributed returns to identify such days, and find that our ORB trading strategy result in significantly higher returns than zero as well as an increased success rate in relation to a fair game when applied to a long time series of crude oil futures contracts. The characteristics of such an approach over conventional statistical tests is that it involves the joint distribution of low, high, open and close over a given time horizon.

Paper [II] assesses the returns of the Opening Range Breakout (ORB) day trading strategy across volatility states of the underlying asset. We calculate the average daily returns of the ORB strategy for each volatility state when applied on long time series of crude oil and S&P 500 index futures contracts. We find an average difference in returns between the highest and lowest volatility state of around 200 basis points per day for crude oil, and of around 150 basis points per day for the S&P 500. Our result suggests that ORB strategy traders can be profitable, even in the long-run, but that the success in day trading to a large extent depend on the volatility of the underlying asset.

Paper [III] performs empirical analysis on short-term and long-term Commodity Trading Advisor (CTA) strategies regarding their exposures to unanticipated risk shocks. Previous research documents that CTA strategies in general offer diversification opportunities during equity market crisis situations when evaluated as a group, but do not separate between short-term and long-term CTA strategies. When separating between short-term and long-term CTA strategies, this paper finds that only short-term CTA strategies provide a significant, and consistent, exposure to unanticipated risk shocks while long-term CTA strategies do not. For the purpose of diversifying a portfolio during equity market crisis situations, our result suggests that an investor should allocate to short-term CTA strategies rather than to long-term CTA strategies.

Paper [IV] posits that it is possible to obtain an optimal leverage factor for financial instruments equipped with embedded leverage. By applying the Kelly criterion for optimal leverage, we show that there exists a uniquely optimal level of leverage for maximizing the long-run profit of embedded leverage instruments. The implication of an existing unique optimum is that a smaller leverage factor than optimal leads to a lower long-term profit than is feasible, but also that a larger leverage factor leads to a lower long-term profit than is feasible. Our empirical analysis shows how an optimal level of embedded leverage can increase the profitability of Exchange Traded Products.

Paper [V] systematically analyses the effect of leverage on long-run profit when trading the Opening Range Breakout (ORB) day trading strategy. This paper clarifies the relation to two optimal leverage rules proposed for maximizing trading profit; the Kelly criterion and the Optimal fraction criterion. Our empirical analysis shows how leverage can increase day trading profit in-sample and out-of-sample when applied to a long time series of DAX 30 index futures contracts.

Ort, förlag, år, upplaga, sidor
Umeå: Umeå University , 2020. , s. 34
Serie
Umeå economic studies, ISSN 0348-1018 ; 974
Nyckelord [en]
Bootstrap, Exchange Traded Products, Kelly criterion, Money management, Opening Range Breakout Strategies, Optimal fraction criterion, Time series momentum
Nationell ämneskategori
Nationalekonomi
Forskningsämne
nationalekonomi
Identifikatorer
URN: urn:nbn:se:umu:diva-179086ISBN: 978-91-7855-300-6 (tryckt)ISBN: 978-91-7855-301-3 (digital)OAI: oai:DiVA.org:umu-179086DiVA, id: diva2:1521889
Disputation
2021-04-09, Hörsal A Samhällsvetarhuset, Hörsalstorget 4, Umeå Universitet, Umeå, 09:15 (Engelska)
Opponent
Handledare
Tillgänglig från: 2021-03-19 Skapad: 2021-01-25 Senast uppdaterad: 2021-04-20Bibliografiskt granskad
Delarbeten
1. Assessing the profitability of intraday opening range breakout strategies
Öppna denna publikation i ny flik eller fönster >>Assessing the profitability of intraday opening range breakout strategies
2013 (Engelska)Ingår i: Finance Research Letters, ISSN 1544-6123, E-ISSN 1544-6131, Vol. 10, nr 1, s. 27-33Artikel i tidskrift (Refereegranskat) Published
Abstract [en]

Is it possible to beat the market by mechanical trading rules based on historical and publicly known information? Such rules have long been used by investors and in this paper, we test the success rate of trades and profitability of the Open Range Breakout (ORB) strategy. An investor that trades on the ORB strategy seeks to identify large intraday price movements and trades only when the price moves beyond some predetermined threshold. We present an ORB strategy based on normally distributed returns to identify such days and find that our ORB trading strategy result in significantly higher returns than zero as well as an increased success rate in relation to a fair game. The characteristics of such an approach over conventional statistical tests is that it involves the joint distribution of low, high, open and close over a given time horizon.

Ort, förlag, år, upplaga, sidor
Elsevier, 2013
Nyckelord
Bootstrap, Crude oil futures, Contraction–Expansion principle, Efficient market hypothesis, Martingales, Technical analysis
Nationell ämneskategori
Nationalekonomi
Forskningsämne
nationalekonomi
Identifikatorer
urn:nbn:se:umu:diva-59547 (URN)10.1016/j.frl.2012.09.001 (DOI)000315537900004 ()2-s2.0-84875811325 (Scopus ID)
Tillgänglig från: 2012-09-17 Skapad: 2012-09-17 Senast uppdaterad: 2023-03-23Bibliografiskt granskad
2. Day Trading Returns Across Volatility States
Öppna denna publikation i ny flik eller fönster >>Day Trading Returns Across Volatility States
2019 (Engelska)Ingår i: IFTA Journal, ISSN 2409-0271, nr 19, s. 76-89Artikel i tidskrift (Refereegranskat) Published
Abstract [en]

This paper measures the returns of a popular day trading strategy – the Opening Range Breakout (ORB) strategy – across volatility states. We calculate the average daily returns of the ORB strategy for each volatility state of the underlying asset when applied on long time series of crude oil and S&P 500 futures contracts. We find an average difference in returns between the highest and the lowest volatility state of around 200 basis points per day for crude oil, and of around 150 basis points per day for the S&P 500. This finding suggests that the success in day trading can depend to a large extent on the volatility of the underlying asset.

Ort, förlag, år, upplaga, sidor
Rockville, Maryland, USA: The International Federation of Technical Analysts, 2019
Nationell ämneskategori
Nationalekonomi
Forskningsämne
nationalekonomi
Identifikatorer
urn:nbn:se:umu:diva-170745 (URN)
Tillgänglig från: 2020-05-14 Skapad: 2020-05-14 Senast uppdaterad: 2021-01-25Bibliografiskt granskad
3. Beyond trends: the reconcilability of short-term CTA strategies with risk shocks
Öppna denna publikation i ny flik eller fönster >>Beyond trends: the reconcilability of short-term CTA strategies with risk shocks
2016 (Engelska)Ingår i: The Journal of Alternative Investments, ISSN 1520-3255, E-ISSN 2168-8435, Vol. 18, nr 3, s. 74-83Artikel i tidskrift (Refereegranskat) Published
Abstract [en]

In this paper, we argue that the value addition from investing in short-term futures trading strategies is their reconcilability with unanticipated risk shocks. We perform empirical analysis on short-term and long-term CTA, i.e., trend-following, strategies and find that the exclusive characteristic of short-term CTAs is their significant and consistent long position in unanticipated risk shocks. Unlike long-term CTA strategies, their exposure to these risk shocks is prevalent in different states of the risk cycle. Our findings imply that short-term futures trading strategies can offer considerable diversification opportunities for investors during equity market crisis situations.

Nationell ämneskategori
Ekonomi och näringsliv
Identifikatorer
urn:nbn:se:umu:diva-132908 (URN)10.3905/jai.2016.18.3.074 (DOI)000412632000006 ()2-s2.0-85028747804 (Scopus ID)
Tillgänglig från: 2017-03-24 Skapad: 2017-03-24 Senast uppdaterad: 2023-03-24Bibliografiskt granskad
4. Optimal embedded leverage
Öppna denna publikation i ny flik eller fönster >>Optimal embedded leverage
2018 (Engelska)Ingår i: Quantitative finance (Print), ISSN 1469-7688, E-ISSN 1469-7696, Vol. 18, nr 7, s. 1077-1085Artikel i tidskrift (Refereegranskat) Published
Abstract [en]

The optimal return magnification of an exchange traded product relative to the returns of its underlying security can increase its profitability.

Ort, förlag, år, upplaga, sidor
Routledge, 2018
Nationell ämneskategori
Nationalekonomi
Forskningsämne
nationalekonomi
Identifikatorer
urn:nbn:se:umu:diva-170746 (URN)10.1080/14697688.2017.1408959 (DOI)000436084900001 ()2-s2.0-85041095236 (Scopus ID)
Tillgänglig från: 2020-05-14 Skapad: 2020-05-14 Senast uppdaterad: 2021-01-25Bibliografiskt granskad
5. Optimal Leverage in Day Trading
Öppna denna publikation i ny flik eller fönster >>Optimal Leverage in Day Trading
2018 (Engelska)Ingår i: Journal of trading, ISSN 1559-3967, Vol. 13, nr 2, s. 57-68Artikel i tidskrift (Refereegranskat) Published
Ort, förlag, år, upplaga, sidor
Institutional Investor Journals, 2018
Nationell ämneskategori
Nationalekonomi
Identifikatorer
urn:nbn:se:umu:diva-146573 (URN)10.3905/jot.2018.13.2.057 (DOI)000428200200006 ()
Tillgänglig från: 2018-05-15 Skapad: 2018-05-15 Senast uppdaterad: 2021-01-25Bibliografiskt granskad

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