ETF Central » trading strategy

Paper freely available from Quantitative Finance for RiskMinds 2010

Michael Bommarito — Thu, 09 Dec 2010 15:05:10 +0000

I received an email from Quantitative Finance informing me that my paper with A. Duran,
A Profitable Trading and Risk Management Strategy Despite Transaction Cost, will be freely available online in a “virtual issue” of the journal on risk. This issue is designed to coincide with the RiskMinds 2010 conference currently taking place. Please access the published version of my paper from InformaWorld here or the entire Risk issue here through the end of the month.

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Paper: L. Kang, S. Babbs. Modelling Overnight and Daytime Returns Using a Multivariate Garch-Copula Model

Michael Bommarito — Mon, 22 Nov 2010 02:42:20 +0000

Abstract: We introduce a multivariate GARCH-Copula model to describe joint dynamics of overnight and daytime returns for multiple assets. The conditional mean and variance of individual overnight and daytime returns depend on their previous realizations through a variant of GARCH specification, and two Student’s t copulas describe joint distributions of both returns respectively. We employ both constant and time-varying correlation matrices for the copulas and with the time-varying case the dependence structure of both returns depends on their previous dependence structures through a DCC specification. We estimate the model by a two-step procedure, where marginal distributions are estimated in the first step and copulas in the second. We apply our model to overnight and daytime returns of SPDR ETFs of nine major sectors and briefly illustrate its use in risk management and asset allocation. Our empirical results show higher mean, lower variance, fatter tails and lower correlations for overnight returns than daytime returns. Daytime returns are significantly negatively correlated with previous overnight returns. Moreover, daytime returns depend on previous overnight returns in both conditional variance and correlation matrix (through a DCC specification). Most of our empirical findings are consistent with the asymmetric information argument in the market microstructure literature. With respect to econometric modelling, our results show a DCC specification for correlation matrices of t copulas significantly improves the fit of data and enables the model to account for time-varying dependence structure.

L. Kang, S. Babbs. Modelling Overnight and Daytime Returns Using a Multivariate Garch-Copula Model. http://ssrn.com/abstract=1710799.

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POMO strategies have not outperformed the S&P 500 YTD 2010

Michael Bommarito — Mon, 01 Nov 2010 22:05:39 +0000

Since I’m sick of hearing ZeroHege purposefully misstating the empirical relationship between POMO and the equity market, I decided to put up this little figure below. This figure demonstrates the performance of the S&P 500 (SPY) in solid black compared to two POMO strategies in dashed black and red (close-close and open-close, respectively).

Note that only holding the market on POMO days has not returned more than the buy-and-hold S&P 500 strategy year-to-date. The S&P 500 has returned 3.62% YTD (close-close, not including dividend, which puts the buy-hold strategy even further ahead), whereas the open-close and close-close strategies have returned -2.63 and 0.79% respectively. These strategies do not even outperform the S&P 500 on a risk-adjusted basis (Sharpe). Furthermore, none of the regressions that were significant (p=0.05) in the 2005-2010 dataset are significant (p=0.1) in the 10 months through this year. In other words, though a relationship between the accepted-submitted proportion and return magnitude exists in the dataset as a whole, this relationship appears to have disappeared on the daily timescale. Sorry, Tyler(s).

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