I noticed that there’s been some analysis of the performance of the market on days with and without POMO from Pragmatic Capitalism. I’ve been running some preliminary calculations for a short research paper on the topic and noticed that my numbers didn’t match up. I’ve decided to publish some of these results.
First of all, I’m using the dataset that I published yesterday on all Permanent Open Market Operations. There have now been 230 POMO operations, including both Treasury and agency transactions and purchases and sales. I’m also using the performance of SPY from August 2005 to October 25th, 2010.
Furthermore, my numbers diverge from the Pragmatic Capitalism on returns. Returns are a bit of a fuzzy concept, however, so I’ve tried quite a few options.
Option 1: Log(close) – Log(open) on the day of POMO. In this case, POMO returns 13.9% with a daily std. dev. of 1.18%, whereas no POMO returns -34.7% and a daily std. dev. of 1.26%. 52.68% of POMO intraday returns are positive, whereas 51.49% of no POMO returns are positive.
Option 2: Log(tomorrow close) – Log(close). In other words, buy at the end of a POMO day and market-on-close tomorrow. In this case, POMO returns 8.30% with a daily std. dev. of 1.46%, whereas no POMO returns -11.4% with a daily std. dev. of 1.56%.
Option 3: Log(close) – Log(yesterday close). This means buy market-on-close the day before POMO and sell market-on-close the day of POMO. This strategy returns 29.5% with a daily std. dev. of 0.57%. The alternative returns -32.7% with a daily std. dev. of 1.44%. Clearly frontrunning POMO on SPY is profitable, but we should all be clear about what we’re calculating when we talk about strategies here.
N.B.: As I mentioned, this will be part of a short research paper in the next week or so. I’ll address whether or not these returns are stable, especially in the past few weeks, in the paper.
