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This paper describes the implementation of an automated equity trading strategy based on aggregated company earnings estimates from independent, buy-side, and sell-side analysts, along with those of private investors and students. By sourcing estimates from a diverse community of individuals (“crowd-sourcing”), Estimize provides an alternative view of earnings expectations compared to traditional sell-side analysts.
We implemented the strategy in the Deltix QuantOffice research platform, a purpose-built C# development studio with embedded math, statistics and data libraries.
This paper describes the implementation of an automated equity trading strategy based on aggregated company earnings estimates from independent, buy-side, and sell-side analysts, along with those of private investors and students. By sourcing estimates from a diverse community of individuals (“crowd-sourcing”), Estimize provides an alternative view of earnings expectations compared to traditional sell-side analysts.
We implemented the strategy in the Deltix QuantOffice research platform, a purpose-built C# development studio with embedded math, statistics and data libraries.
This paper describes the implementation of an automated equity trading strategy based on aggregated company earnings estimates from independent, buy-side, and sell-side analysts, along with those of private investors and students. By sourcing estimates from a diverse community of individuals (“crowd-sourcing”), Estimize provides an alternative view of earnings expectations compared to traditional sell-side analysts.
We implemented the strategy in the Deltix QuantOffice research platform, a purpose-built C# development studio with embedded math, statistics and data libraries.
www.deltixlab.com 2 The Main Thesis Earnings estimates from independent analysts serve as a basis for prediction of overnight market price movement, to generate alpha in US equities.
2 www.deltixlab.com 3 Overall methodology Sources of data: Estimize draws estimates from a diverse community of individuals (crowd- sourcing); Historical bars of 1min periodicity for S&P500 ticker universe.
Major steps of the research: Creation of initial setup; Analysis of Estimize data; Review of approaches suggested by Estimize, implementation of these approaches by means of QuantOffice Strategy Designer; Investigation of main hypothesis which relies on earnings surprises we can exploit to generate excess returns; Creation and backtesting of strategy generating trading signals based on Estimize estimates. 3 www.deltixlab.com 4 Overview of Estimize Data in TimeBase 4 www.deltixlab.com Company reports Ticker; Release date and time; Release id; Fiscal year and quarter; Actual EPS and revenue; Wall Street EPS and Revenue forecast.
5 5 www.deltixlab.com Estimize estimates Ticker; Creation time; Estimate_id; Release_id; Estimize EPS and revenue forecast. 6 Historical Bar1min Data Historical bars of 1min periodicity for S&P100 ticker universe; Total volume of data used in research is approximately 20,000,000 messages. 6 www.deltixlab.com 7 Estimize Strategy Suggestions 7 www.deltixlab.com Parameter All Trades Long Trades Short Trades Net Profit/Loss 3,526.05 4,161.70 -635.65 Total Profit 15,001.30 12,980.15 2,021.15 Total Loss -11,475.25 -8,818.45 -2,656.79 Cumulated Profit % 3.53 % 4.16 % -.64 % Max Drawdown -1,374.99 -1,487.87 -953.00 Max Drawdown % -1.36 % -1.46 % -.95 % Max Drawdown Date 4/18/2013 4/18/2013 10/21/2013 Return/Drawdown Ratio 2.56 2.80 -0.67 Drawdown Days % 74.41 % 69.73 % 96.09 % Max Drawdown Duration 146 133 362 CAGR 1.78 % 2.09 % -.32 % Sharpe Ratio 1.26 1.34 -0.56 Annualized Volatility 1.41 1.56 0.58 Sortino Ratio 1.89 2.07 -0.74 UPI 0.30 0.36 -0.04 Information Ratio 1.26 1.34 -0.56 Optimal f 89.27 85.74 -96.86 All Trades # 440 360 80 Profitable Trades Ratio 0.55 0.58 0.45 Winning Trades # 244 208 36 Losing Trades # 196 152 44 Average Trade 8.01 11.56 -7.95 Average Winning Trade 61.48 62.40 56.14 Average Losing Trade -58.55 -58.02 -60.38 Avg. Win/ Avg. Loss Ratio 1.05 1.08 0.93 Average Profit per Share 0.04 0.06 -0.03 Max Conseq. Winners 9 12 6 Max Conseq. Losers 7 8 10 8 Estimize Strategy Suggestions 8 www.deltixlab.com Parameter All Trades Long Trades Short Trades Net Profit/Loss 2,247.09 299.13 1,947.95 Total Profit 12,561.88 809.73 11,752.15 Total Loss -10,314.80 -510.59 -9,804.20 Cumulated Profit % 2.25 % .30 % 1.95 % Max Drawdown -1,682.98 -223.26 -2,258.80 Max Drawdown % -1.63 % -.22 % -2.19 % Max Drawdown Date 11/6/2012 5/8/2013 11/6/2012 Return/Drawdown Ratio 1.34 1.34 0.86 Drawdown Days % 94.14 % 66.41 % 93.95 % Max Drawdown Duration 363 232 363 CAGR 1.13 % .15 % .98 % Sharpe Ratio 0.63 0.59 0.53 Annualized Volatility 1.81 0.26 1.86 Sortino Ratio 1.42 0.91 1.12 UPI 0.08 0.08 0.05 Information Ratio 0.62 0.59 0.52 Optimal f 34.55 232.73 28.37 All Trades # 439 24 415 Profitable Trades Ratio 0.50 0.71 0.49 Winning Trades # 221 17 204 Losing Trades # 218 7 211 Average Trade 5.12 12.46 4.69 Average Winning Trade 56.84 47.63 57.61 Average Losing Trade -47.32 -72.94 -46.47 Avg. Win/ Avg. Loss Ratio 1.20 0.65 1.24 Average Profit per Share 0.02 0.06 0.02 Max Conseq. Winners 12 7 12 Max Conseq. Losers 8 2 14 9 Market Over-reaction Hypothesis Company EPS and revenue report happens overnight:
Using Estimize data as a basis for overnight market movement prediction (the holding period is about 19 hours). 9 www.deltixlab.com 10 Estimize Estimates Distribution The average number of estimates per reporting period for a ticker universe of the S&P100:
Directionality in estimates? 10 www.deltixlab.com Ticker Number Ticker Number Ticker Number AAPL 186.57 MON 10.43 BMY 4.13 GOOG 70.62 HON 10.33 FCX 4.00 AMZN 53.10 JNJ 9.64 APC 3.88 NKE 40.22 CVS 9.23 MET 3.80 SBUX 33.00 WMT 9.15 UNP 3.78 EBAY 32.85 PG 9.00 WAG 3.67 INTC 30.46 FDX 8.50 RTN 3.43 DIS 28.00 CL 7.50 UPS 3.43 JPM 27.56 UNH 7.50 LLY 3.36 CSCO 25.91 AIG 7.44 AEP 3.33 IBM 24.85 MRK 7.25 DOW 3.00 F 24.45 GILD 7.11 NOV 2.75 MSFT 22.92 ABT 6.78 NSC 2.75 V 22.64 HAL 6.67 MDT 2.67 ORCL 21.30 AMGN 6.63 SO 2.67 QCOM 19.83 BAX 6.57 MMM 2.63 HPQ 19.73 EMR 6.57 MDLZ 2.33 MA 18.38 PEP 6.50 UTX 2.33 HD 17.36 BA 6.44 DVN 2.25 DELL 16.71 T 6.44 EXC 2.25 EMC 16.25 LMT 6.29 COF 2.09 WFC 16.00 CVX 6.09 COP 2.00 LOW 15.88 MS 5.83 MO 2.00 GS 15.62 PFE 5.50 OXY 2.00 TGT 14.56 VZ 5.13 BK 1.88 COST 13.82 TWX 5.00 APA 1.75 TXN 13.77 SLB 4.78 PM 1.50 BAC 13.58 AXP 4.69 WMB 1.00 C 13.00 USB 4.50 ALL 0.00 MCD 13.00 XOM 4.40 BRK.B 0.00 CAT 11.31 DD 4.25 SPG 0.00 GE 11.11 ACN 4.22 KO 10.64 GD 4.20 - Estimize EPS Estimate - Mean Estimize Estimate 11 Short Term and Long Term Period
11 www.deltixlab.com 12 12 Directionality in Estimates Optimistic:
Pessimistic:
Neutral
www.deltixlab.com 13 Trading Hypothesis
13 Earnings surprise leads to market over-reaction;
Relatively higher optimism in the short term forecast compared to the long-term forecast usually leads to negative price movement after the actual earnings announcement, as the announcement will probably miss the short term expectation, and the stock price will fall.
On the other hand, where long term optimism is followed by short term, pre- announcement, pessimism then this predicts positive stock price movement.
16 Trade on S&P100, Back-testing period: from Dec 26, 2011 to Dec 31, 2013.
www.deltixlab.com Parameter All Trades Long Trades Short Trades Net Profit/Loss 25,947.52 15,778.04 10,169.47 Total Profit 90,871.62 60,417.49 30,454.13 Total Loss -64,924.10 -44,639.44 -20,284.66 Cumulated Profit % 25.95 % 15.78 % 10.17 % Max Drawdown -2,795.19 -2,062.33 -2,342.88 Max Drawdown % -2.39 % -1.86 % -2.12 % Max Drawdown Date 1/28/2013 1/24/2013 7/31/2013 Return/Drawdown Ratio 9.28 7.65 4.34 Drawdown Days % 67.13 % 77.43 % 74.65 % Max Drawdown Duration 62 134 82 CAGR 12.61 % 7.83 % 5.11 % Sharpe Ratio 2.40 1.73 1.49 Annualized Volatility 5.25 4.53 3.44 Sortino Ratio 4.17 2.95 2.70 UPI 1.07 0.64 0.43 Information Ratio 2.21 1.63 1.45 Optimal f 45.77 38.22 43.32 All Trades # 607 447 160 Profitable Trades Ratio 0.55 0.55 0.55 Winning Trades # 333 245 88 Losing Trades # 274 202 72 Average Trade 42.75 35.30 63.56 Average Winning Trade 272.89 246.60 346.07 Average Losing Trade -236.95 -220.99 -281.73 Avg. Win/ Avg. Loss Ratio 1.15 1.12 1.23 Average Profit per Share 0.20 0.17 0.26 Max Conseq. Winners 8 7 7 Max Conseq. Losers 6 6 5 17 Market Neutrality 17 www.deltixlab.com 18 PnL Curve and Statistics: $ neutral
18 Trade on S&P100, Back-testing period: from Dec 26, 2011 to Dec 31, 2013.
www.deltixlab.com Parameter All Trades Long Trades Short Trades Net Profit/Loss 22,424.25 15,504.83 6,919.42 Total Profit 100,569.70 64,708.04 35,861.66 Total Loss -78,145.44 -49,203.20 -28,942.24 Cumulated Profit % 22.42 % 15.50 % 6.92 % Max Drawdown -2,803.85 -2,518.20 -2,973.51 Max Drawdown % -2.45 % -2.15 % -2.87 % Max Drawdown Date 1/28/2013 2/18/2014 8/21/2012 Return/Drawdown Ratio 8.00 6.16 2.33 Drawdown Days % 75.96 % 80.00 % 89.54 % Max Drawdown Duration 84 134 130 CAGR 10.13 % 7.12 % 3.24 % Sharpe Ratio 2.04 1.59 0.88 Annualized Volatility 4.97 4.47 3.68 Sortino Ratio 3.42 2.66 1.43 UPI 0.76 0.52 0.18 Information Ratio 1.90 1.51 0.87 Optimal f 41.09 35.69 23.93 All Trades # 864 539 325 Profitable Trades Ratio 0.53 0.54 0.50 Winning Trades # 454 291 163 Losing Trades # 410 248 162 Average Trade 25.95 28.77 21.29 Average Winning Trade 221.52 222.36 220.01 Average Losing Trade -190.60 -198.40 -178.66 Avg. Win/ Avg. Loss Ratio 1.16 1.12 1.23 Average Profit per Share 0.13 0.15 0.11 Max Conseq. Winners 10 7 6 Max Conseq. Losers 6 6 6 19 PnL Curve and Statistics: beta neutral
19 Trade on S&P100, Back-testing period: from Dec 26, 2011 to Dec 31, 2013.
www.deltixlab.com Parameter All Trades Long Trades Short Trades Net Profit/Loss 20,729.05 15,198.49 5,530.55 Total Profit 91,018.20 57,871.21 33,146.99 Total Loss -70,289.15 -42,672.71 -27,616.44 Cumulated Profit % 20.73 % 15.20 % 5.53 % Max Drawdown -2,857.78 -2,131.02 -3,164.71 Max Drawdown % -2.51 % -1.92 % -3.08 % Max Drawdown Date 1/28/2013 1/24/2013 7/26/2012 Return/Drawdown Ratio 7.25 7.13 1.75 Drawdown Days % 48.10 % 52.03 % 59.49 % Max Drawdown Duration 80 134 113 CAGR 6.86 % 5.11 % 1.91 % Sharpe Ratio 1.68 1.41 0.61 Annualized Volatility 4.08 3.63 3.13 Sortino Ratio 2.84 2.38 0.95 UPI 0.65 0.50 0.12 Information Ratio 1.58 1.34 0.61 Optimal f 41.13 38.84 19.60 All Trades # 778 476 302 Profitable Trades Ratio 0.53 0.55 0.49 Winning Trades # 410 262 148 Losing Trades # 368 214 154 Average Trade 26.64 31.93 18.31 Average Winning Trade 222.00 220.88 223.97 Average Losing Trade -191.00 -199.41 -179.33 Avg. Win/ Avg. Loss Ratio 1.16 1.11 1.25 Average Profit per Share 0.14 0.17 0.09 Max Conseq. Winners 10 7 6 Max Conseq. Losers 7 6 6 Summary Estimize estimates serve as a strong predictive factor of price directionality; Estimize approaches were tested using QuantOffice strategy development and back-testing functionality; The relative optimism or pessimism of short term versus long term Estimize estimates is a strong predictive factor of the price directionality after EPS announcements; Dollar-neutral and beta-neutral portfolios demonstrate that the achieved effect is uncorrelated with the market. On stocks in the S&P100, back-testing shows that the unhedged strategy has an average Information ratio of 2.21 over the period 2012-2013, with a stronger performance in 2012. Dollar-neutral and beta-neutral strategies achieved Information Ratios of 1.90 and 1.58 respectively, which indicates that the strategy does generate alpha.
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