Journal of Investment Strategies
Editor-in-chief: Ali Hirsa
Volume 11, Number 1 (March 2022)
Professor, Columbia University & Managing Partner, Sauma Capital LLC
Welcome to the first issue of the eleventh volume of The Journal of Investment Strategies, which contains three research papers.
In our first paper, “Trading strategies and weekly anomalies in the stock market: Mexico, Indonesia, Nigeria and Turkey”, Ruchika Gahlot investigates the day-of-the-week impact and the efficiency of the stock markets of the so-called MINT countries: Mexico, Indonesia, Nigeria and Turkey. The study also examines the leverage effect and the asymmetric effect of news. Gahlot shows that some regular anomalies persist in those markets, in either the return or the risk patterns. These anomalies could be due to having less developed market infrastructure, to the quality of the instruments traded on the floor, or to the regulatory practices of the MINT countries. Subsequently, regardless of the utilization of information technology and reforms, stock markets are not fully efficient. The paper’s results suggest that the presence of idiosyncrasies gives traders the chance to devise beneficial trading strategies to make profits from the anomalies. However, Gahlot emphasizes the dependency of the outcomes on historical data, and if history fails to repeat itself, a speculator will probably not have the option to gain significant profit under the above premise. These idiosyncrasies will only help traders to gain expanded profits in the short run. Forces of supply and demand, as well as countervailing arbitrage, will exploit the excess return, leaving no further expansion in such abnormalities, thereby improving market efficiency over the long term.
In the issue’s second paper, “Does reinvesting payouts in plain vanilla exchange-traded funds enhance household portfolio performance?”, Hans Philipp-Wanger simulates and analyzes the investment performance of German household portfolios with and without an XTF reinvestment strategy. The methodology, process and metrics that the author applies to simulate and evaluate the performance of various portfolios are effectively designed and rigorous, and they are elaborated upon in detail. Based on the paper’s findings, one can imply that reinvesting payoffs in XTFs represents a promising strategy to enhance households’ portfolio performance after transaction costs in the long run. Therefore, the portrayed investment strategy represents a useful alternative for households who already own financial assets and want to switch their portfolio to XTFs but are unable or unwilling to sell their current assets.
In the third and final paper in this issue, “The risk-reversal premium”, Blair Hull and Euan Sinclair explain the risk-reversal premium and show how to make use of it to improve portfolio performance. The authors first discuss the variance risk premium and the risk-reversal premium. They make it clear that the entry price of the portfolio is decided by the implied skewness of the underlying distribution, while the Greek Vanna determines the expected profit of the strategy. They then introduce the settings for backtesting and give the results of the ideal daily-hedged case, the loosely hedged case and the case with transaction costs. They also examine the dependence of the profit using options with different Deltas on the Greek Vanna. Finally, the risk-reversal premium is treated as a factor and they demonstrate that it can improve the Sharpe ratio of US equity ETFs. The paper also explains the logic of the risk-reversal premium and verifies its relation with Vanna using historic data. They show that risk reversals have been significantly mispriced in US equity indexes and that they can be traded as a hedged, market-neutral strategy or used as a component of a directional portfolio.
On behalf of the editorial board, we hope you have been doing well throughout the Covid-19 pandemic. We would like to thank you, our readers, for your continued support and keen interest in our journal. We look forward to sharing with you the growing list of practical papers on a wide variety of topics on modern investment strategies that we continue to receive from both academics and practitioners.
Papers in this issue
Trading strategies and weekly anomalies in the stock market: Mexico, Indonesia, Nigeria and Turkey
This paper explores the day-of-the-week impact and efficiency of the stock markets in Mexico, Indonesia, Nigeria and Turkey by using closing prices of a major index from each stock market.
Does reinvesting payouts in plain vanilla exchange-traded funds enhance household portfolio performance?
This study analyzes whether reinvesting payouts in exchange-traded funds that replicate broad and internationally diversified market indexes enhances households’ portfolio performance after transaction costs.
The risk-reversal premium
We show that including risk reversals in an equity portfolio creates a better portfolio compared with a pure index position.