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On the returns of trend-following trading strategies
Umeå University, Faculty of Social Sciences, Umeå School of Business and Economics (USBE), Economics.ORCID iD: 0000-0001-9263-063x
2017 (English)Licentiate thesis, comprehensive summary (Other academic)Alternative title
Avkastningen från trendföljande handelsstrategier (Swedish)
Abstract [en]

Paper [I] tests the success rate of trades and the returns of the Opening Range Breakout (ORB) strategy. A trader 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.

Paper [II] measures the returns of a popular day trading strategy, the Opening Range Breakout strategy (ORB), 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.

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 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, this result suggests that an investor should allocate to short-term CTA strategies rather than to long-term CTA strategies.

Place, publisher, year, edition, pages
Umeå: Umeå universitet , 2017. , 18 p.
Series
Umeå economic studies, ISSN 0348-1018 ; 948
Keyword [en]
Bootstrap, Commodity Trading Advisor funds, Contraction-Expansion principle, Crude oil futures, Futures trading, Opening Range Breakout strategies, S&P 500 futures, Technical analysis, Time series momentum, Time-varying market inefficiency
National Category
Economics and Business
Research subject
Economics
Identifiers
URN: urn:nbn:se:umu:diva-132914ISBN: 978-91-7601-691-6 (print)OAI: oai:DiVA.org:umu-132914DiVA: diva2:1084388
Presentation
2017-04-28, S 205h Samhällsvetarhuset, Umeå, 13:00 (English)
Opponent
Supervisors
Available from: 2017-03-27 Created: 2017-03-24 Last updated: 2017-03-27Bibliographically approved
List of papers
1. Assessing the profitability of intraday opening range breakout strategies
Open this publication in new window or tab >>Assessing the profitability of intraday opening range breakout strategies
2013 (English)In: Finance Research Letters, ISSN 1544-6123, E-ISSN 1544-6131, Vol. 10, no 1, 27-33 p.Article in journal (Refereed) 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.

Place, publisher, year, edition, pages
Elsevier, 2013
Keyword
Bootstrap, Crude oil futures, Contraction–Expansion principle, Efficient market hypothesis, Martingales, Technical analysis
National Category
Economics
Research subject
Economics
Identifiers
urn:nbn:se:umu:diva-59547 (URN)10.1016/j.frl.2012.09.001 (DOI)000315537900004 ()
Available from: 2012-09-17 Created: 2012-09-17 Last updated: 2017-03-27Bibliographically approved
2. Day trading returns across volatility states
Open this publication in new window or tab >>Day trading returns across volatility states
2017 (English)Report (Other academic)
Abstract [en]

This paper measures the returns of a popular day trading strategy, the Opening Range Breakout strategy (ORB), 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.

Place, publisher, year, edition, pages
Umeå: Umeå universitet, 2017. 32 p.
Series
Umeå economic studies, ISSN 0348-1018 ; 861
Keyword
Contraction-Expansion principle, Futures trading, Opening Range Breakout strategies, Time-varying market inefficiency
National Category
Economics
Identifiers
urn:nbn:se:umu:diva-90941 (URN)
Available from: 2014-07-03 Created: 2014-07-03 Last updated: 2017-03-24Bibliographically approved
3. Beyond Trends: The Reconcilability of Short-Term CTA Strategies with Risk Shocks
Open this publication in new window or tab >>Beyond Trends: The Reconcilability of Short-Term CTA Strategies with Risk Shocks
2016 (English)In: The Journal of Alternative Investments, ISSN 1520-3255, E-ISSN 2168-8435, Vol. 18, no 3, 74-83 p.Article in journal (Refereed) 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.

National Category
Economics and Business
Identifiers
urn:nbn:se:umu:diva-132908 (URN)10.3905/jai.2016.18.3.074 (DOI)
Available from: 2017-03-24 Created: 2017-03-24 Last updated: 2017-03-27Bibliographically approved

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